“A lie gets half way around the world before the truth has time to put its pants on.”
Winston Churchill might not have been talking about the common misconceptions of financial protection, but his statement applies just as well.
What do we mean by ‘financial protection’?
Insurance, emergency funds and the plans you have in place to keep you and your family afloat, should something go wrong, money-wise. These may include:
- Life Insurance: Pays a lump sum if you die while the policy is in force.
- Critical Illness Cover: Pays a lumps sum or income if you are diagnosed with a serious illness covered by the policy.
- Income protection: Provides a portion of your usual pay if you are unable to work for a prolonged period.
- Emergency savings: Accessible savings, which should be enough to cover your essential household costs for three to six months.
Despite the wealth of information available online, offline and everywhere in between, three phrases are repeatedly uttered by people who don’t have financial protection in place:
- “Insurance is too expensive”
- “I don’t need financial protection”
- “Insurance companies don’t pay out”
If you find yourself nodding emphatically while reading those, please read on. Even if you know what’s coming, let us challenge your misconceptions.
The cost of insurance
There are many variations of this myth, including:
- “I can’t afford the premiums”
- “It’s better to put the price of premiums in savings each month”
- “It’s not worth it for the price”
In 2016, 22% of households had life assurance (a worryingly low number, but that’s a blog for another day) with the average household spending £336 per year on Life Insurance premiums. Taking out a policy earlier in life will result in lower premiums, while older people will see higher monthly costs, though not by much. (Source: Association of British Insurers(ABI)
If someone offered you a new car for £336 per year, the chances are you’d jump at the offer and find a way to make it work. Therefore, the decision whether to protect your income is all about financial priorities.
Could that money be better off in a savings account?
An insurance policy will pay out for a successful claim, no matter how long you have had it. Consequently, a successful claim could be made after a short period of time, such as a year. Compare that to putting the same amount into a bank account, which will leave you with just the money you have put in, plus a small amount of interest; that probably won’t even pay your mortgage for the month.
The chances of needing protection
There are three main reasons for believing that you don’t need protection:
1. You’re covered by your employer
If you are lucky enough to have employer benefits that cover you in the event of injury, illness or death, that’s great. But, there are a few things to keep in mind if that is the only protection you have.
If your employer provides cover, do you know enough about it to have it as your only safety net? Things like:
- How much you are covered for
- The terms of the cover
- Whether the policy is suitable for your circumstances
- If it will provide enough money for your family, should something happen
In addition, employer policies only last for as long as you are an employee of that company. Given the transient nature of modern careers, you will lose that cover when you move on to the next opportunity.
Therefore, it makes sense to take personal cover, particularly if you are young and healthy. This way, you are always covered, regardless of where and how you work.
Employer cover is best viewed as a bonus over and above your own contingency planning. Much like saving for retirement, your employer contributions are a nice starting point, but they likely won’t be enough when you need to rely on them.
2. You don’t think you will get ill
You might firmly believe that you will never get ill or have an accident. Maybe you’re also immortal?
“It wasn’t raining when Noah built the ark” is one of my favourite quotes from the late Howard Ruff (and it’s always nice to reference a fellow financial adviser).
Financial protection is all about planning ahead. If you’re in great physical and mental health right now, that simply means that your premiums are likely to be lower. Therefore, if you do end up needing to make a claim in the future, you get better value for money.
3. The provider won’t pay out anyway
This is a frustrating myth for many financial professionals to answer. Instead, I’ll let the biggest insurance providers speak for themselves. In 2016, the percentages of successful Life Insurance claims were:
- Aegon: 98%
- AIG: 95%
- Aviva: 98.9%
- Legal & General : 98.6%
- Liverpool Victoria: 98%
- Royal London: 96.8%
- Vitality Life: 99%
- Scottish Widows: 99.4%
- Zurich: 98%
In fact, the most common reasons for unsuccessful insurance claims were due to misunderstandings and discrepancies in policy holder communication. So, if you’re upfront and honest when answering the provider’s questions, and read all the paperwork carefully, you shouldn’t have much to worry about.
It’s not nice to think about, but having financial protection in place is such a relief if it turns out to be needed. If your partner were to fall ill and be unable to work for six months, it is unlikely that finances would be your first thought. But, knowing that there is a safety net in place will make it easier to focus on the processes that follow an accident, diagnosis, or family death.
After quoting Churchill and Ruff, it only feels right to end with some wise words from American writer, Zig Ziglar:
“Expect the best. Prepare for the worst. Capitalize on what comes.”
The insurance products mentioned in this article are based on an assessment of the health of the applicant and it is unlikely that cover will be available for previous or existing medical conditions. You should always refer the terms and conditions of a policy or seek advice in order to understand what the policy does and does not cover before making an application.