When it comes to managing your finances, many of us focus on the positive aspects: building wealth, planning for retirement, or helping family members. We often insure our cars, homes, and even our mobile phones, but when it comes to life’s more difficult scenarios—such as illness, job loss, or death—many people hesitate to take the necessary steps. Financial protection, however, is a critical part of any comprehensive financial plan. It ensures that, in the event of an unexpected life change, your finances won’t be left in disarray.
Why Should Protection Be Part of Your Financial Plan?
Life is unpredictable, and the risks we face, like illness, injury, or the loss of a key breadwinner, can have profound effects on a family’s financial stability. If you haven’t taken steps to prepare for these circumstances, you could find yourself in a situation where you can’t cover daily expenses or meet other financial obligations.
For example, consider the case of John and Jill. John, aged 58, has recently been made redundant, and he and his wife are now evaluating their readiness for retirement. John’s pension, along with their future state pensions, seem sufficient to cover their household expenses. However, after considering what would happen if John were to pass away unexpectedly, it becomes clear that Jill would be left with a much smaller income, unable to maintain their lifestyle until she reaches state pension age.
To address this, John and Jill decided to insure against early death, ensuring that Jill would have the financial security she needs if John were to pass away before her retirement age. This peace of mind means they can confidently plan for the future, knowing that unexpected events are covered.
Life Insurance and Other Protective Measures
Protection is often overlooked when creating financial plans, yet it’s essential for ensuring financial stability. Life insurance, for instance, provides a crucial safety net for your family if something were to happen to you. This can provide either a lump sum or periodic payments to cover living expenses, outstanding debts, or other financial needs. Life insurance can also protect you against the financial implications of terminal illness or job loss.
Moreover, some employers provide life cover as part of their employee benefits package. While this is helpful, it’s important to consider whether the coverage is adequate for your family’s needs. It’s also wise to build an emergency fund, which can act as a financial cushion in case of unexpected expenses or temporary loss of income. Ideally, this fund should cover 3-6 months of living expenses.
Legal Protection: Wills and Powers of Attorney
Legal protection is another crucial aspect of financial planning. A well-crafted will ensures that your assets are distributed according to your wishes after your death. Without a valid will, your estate could be distributed according to intestacy laws, which might not align with your intentions. This is especially important if you have children or a long-term partner but are not legally married.
A power of attorney is also important to ensure that someone you trust has the legal authority to make decisions about your finances and healthcare if you lose the capacity to make those decisions yourself. Without a power of attorney, your loved ones may need to apply to the court to gain this authority, which can be both costly and time-consuming.
The Importance of Having a Will
In our example, Bob, a long-time client, never got around to updating his will. Despite reminders, he never legally formalized his wishes, leaving his estate vulnerable. When Bob unexpectedly passed away, his partner Mandy was left in a difficult position, as under intestacy laws, his estate would go to his brother, not her. Fortunately, Bob had completed an “expression of wishes” for his pension fund, allowing Mandy to inherit it.
This situation underscores the importance of regular updates to your will, especially after significant life changes. Your will should reflect your current family situation, ensuring that your assets go to the right people. If you are unmarried but live with a long-term partner, consider discussing options such as marriage or civil partnership to offer additional protection to your loved ones.
Emergency Funds and Business Protection
In addition to life insurance and legal protection, another key area to consider is setting up an emergency fund. An emergency fund provides financial stability when life throws unexpected challenges your way. Whether it’s job loss, unexpected medical bills, or urgent repairs, an emergency fund prevents you from relying on credit or selling investments at a loss.
For business owners, it’s crucial to consider business protection. Key person insurance, for example, protects against the loss of a critical employee and ensures that the business can continue to operate during a difficult time. It can also provide financial compensation for any disruption caused by illness, injury, or death of a key employee.
Conclusion
Protecting your finances isn’t just about building wealth; it’s about ensuring that your family and your assets are safeguarded when life takes an unexpected turn. By incorporating life insurance, emergency savings, legal documents like wills and powers of attorney, and business protection into your financial plan, you can reduce the risk of financial instability in the face of the unpredictable. Taking the time now to consider these protective measures will not only offer peace of mind but also help you navigate the uncertainties of life with greater confidence and security.
