I would like to go back to basics, and start with what I refer to as the safety nets of the financial planning process. We all like to think that we are invincible, and nothing is going to happen to us, and thankfully for the vast majority this is the case, but for a significant few, unfortunately the worst does happen. No one likes to talk about or even think about their own death, but what is even worse is not to plan for the worst case scenario.
To begin the process, there are three generic questions to assist with your overall financial planning;
• What would happen if you died before you have financial security?
• What would happen if you lived too long and your money runs out?
• And finally what would happen if you might get sick in the meanwhile.
This issue obviously relates to the first question, but it should not be viewed in isolation as the other questions are equally as important. Indeed it could be argued that financial death is more painful than actual death as you would still be alive but unable to work and look after your family.
By way of an example let us assume a husband and wife with two children, and the issues that they may face. Why do you need life cover? There are probably a whole host of reasons, but the main one will be to replace you financially in the event of your death. That may sound harsh, but that is what life cover is for. It is to replace your income that you would have earned if you were alive to support your family.
Therefore to begin to calculate the actual amount of cover that you require by establishing your income now and how much of that your family would need to continue to enjoy the lifestyle that they currently have. Once you have this figure for one year, it needs to be multiplied by the amount of years the cover is required. This may be until you retire or until your children are financially independent. Again this will depend on your individual circumstances.
With this figure now established, you can deduct assets that you may have already accumulated and life policies that are already in force, assuming that these are competitively priced, and cover the desired period of time to reach the final figure.
The next question is to review the type of life cover to implement. There are two main types; the first is term assurance, and the second is whole of life. Term assurance will provide life cover for a fixed period of time and will no accumulate a fund value.
Whole of Life assurance as the name suggests can offer cover for the whole of your life without a fixed maturity date, other than when death actually occurs. This type of cover can build up a fund value which can be returned to you as and when you decide cover is no longer required. This type of cover is generally more expensive for the same level of cover, because it has no end date, and there is the investment content as well.
Generally I would suggest that term assurance is the better option as the cost of the cover is usually significantly lower, and is designed for one purpose only – life cover.
In addition to considering life cover, I would always recommend reviewing the rest of your protection requirements such as critical illness cover and income protection. Both of these assist with ‘financial death’, as I have mentioned earlier, and can be combined with life cover to offer the full package of protection.
James Thomas is regional director at Acuma Independent Financial Advice. Opinion expressed here are his own and do not necessarily represent the view of Gulf News.
