30 Th9, 2024
Protecting your finances
Finance , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Why don’t all clients want to talk about protection? What does protection as an overarching concept cover? Do we have a psychological bias towards talking about the good stuff; the plans, accumulating wealth, helping children and grandchildren. Insuring our cars, homes, even our mobile phones has become standard practice, but an alarming number of adults do not have enough life insurance cover [1]. So why avoid getting into the dark corners of what can go wrong within a financial plan and protect that too?

Our mission at Saltus is to improve our clients’ relationship with their wealth. To do this we work on identifying what is intrinsically important to them and what sort of lifestyle they want now, and in the future. Then we build a plan to show them what their financial future looks like and help them manage their assets in line with this plan.

This is all well and good, but what if the worst happens and someone passes away? Or, what if one of the household members gets so ill that they cannot work and needs someone to look after them?  Often when we have these conversations with clients, we get verbal acknowledgement they understand the importance on protecting against such events. But all too often taking the required actions is not seen as an immediate priority, and our clients want to revisit it as part of a later review.

How much do you need to retire and more…

crucial aspect of comprehensive financial planning, serving as a safeguard against unforeseen events that can jeopardise financial wellbeing. Examining the significance and importance of financial protection involves delving into the reasons as to why it matters, and the difficult “what if” scenarios to try and establish priorities.

Life is, of course, unpredictable and various risks such as illness, accidents, or the death of a breadwinner can significantly affect a family’s financial stability. Insurance policies play a crucial role in protecting individuals and families from the financial fallout of these unforeseen circumstances.

Consider the case of a family where the primary earner suddenly passes away or gets so ill that they are no longer able to work. Without proper protection in place, the remaining family members may face immense challenges meeting their financial requirements. In this instance, life insurance acts as a financial safety net, providing a lump sum or periodic payments, ensuring the family can maintain their standard of living despite the loss of income.

To give you a real-life example, John and Jill have come to us for retirement planning following John’s redundancy at age 58. They are wondering if they have enough to retire now. John is 7 years older than Jill and has a final salary pension which will commence at age 65.

Modelling has shown John’s final salary scheme, plus their future state pensions and income from their other pensions and investments is more than sufficient to cover their expenditure. We could stop there, but it is important to ask the difficult questions, such as “what happens if John passes away sooner than planned?”.

In this case, it would mean Jill only receives a spousal pension of 1/3rd of the final salary pension John would get, if he were still alive [2]. Additionally, his state pension would not be paid. Looking at Jill’s lifestyle plans and bills, the household expenditure would only be slightly lower.

Simply put in this scenario, Jill would not have enough money to meet her required lifestyle until she reaches her state pension age (67), at which point she should then have enough money coming in.

Following this modelling and the difficult conversations, we have agreed to insure John against early death up until Jill’s state pension age. This means they both have the peace of mind not only that they know what their financial future looks like, but also there is some protection in place for Jill if the worst were to happen to John.