Ten steps to financial freedom: Protect your wealth
Protect Your Wealth
Once you've got your finances in order, you need to ensure they stay that way. Life can throw any number of unexpected oddities at you, and the value of financial security in the event that a "what-if" actually happens cannot be overstated. It's dull, it's depressing, it often feels like spending good money on nothing at all, but it's also the only thing protecting you when fate gets nasty: it's insurance.
Protect your income
What happens if I'm hurt or ill and cannot work? To protect yourself and your family against financial hardships brought about by accident, sickness, and unemployment, you're best to invest in income protection insurance, also known as Accident, Sickness, and Unemployment (ASU) cover.
As with all financial products, with ASU cover, you're urged to shop around carefully! Buy it from your mortgage lender and you will typically be charged £5 to £8 per £100 of cover per month for a policy that pays up to twelve monthly benefits during the course of a single claim. Shopping around could reduce this to £3. Also don't forget that on many policies you can't start to claim until you have been without a salary for at least three months (although it does get backdated).
A word of caution: Payment Protection Insurance (PPI), an insurance policy to reduce everyday risks, sounds ideal, but unsavoury industry practices mean that PPI is far less attractive than it should be. If you are considering PPI, try contacting an insurance broker, as most stand-alone policies easily undercut mortgage lenders' premiums. You may find that Income Protection (IP) insurance is worthwhile alternative to PPI.
Protect your mortgage
If you've got a mortgage, you know the warning: your home is at risk of repossession if you are unable to make your mortgage payments (or those on any loan secured against your home). The best way to protect your home and mortgage just in case the unexpected happens is with Mortgage Payment Protection Insurance (MPPI), best bought from a stand-alone lender as opposed to your mortgage broker.
Protect your savings
Thanks to inflation, not all saved money is safe money. Let's say inflation is running at roughly 2% a year, which means every year, the same things cost 2% more. This means money put in a savings account with 2% interest would actually only be keeping up to the rate of inflation – in effect, not growing.
In fact, if you're a basic-rate taxpayer (paying 20% savings tax), you need to earn 2.5% a year just to keep pace with inflation. Higher-rate taxpayers would need to earn 3.3% a year. To beat inflation, you need to ensure your savings are in an environment with a growth rate strong enough to make a difference over not just over a year, but over the course of five, ten, or twenty years. The best place we can think of? The stock market, of course!
Protect your family
We've looked at everything else that can go wrong, now let's turn our tragic gaze to the big one: death, and what happens to the people you leave behind.
Your ability to earn money is your most valuable possession. If there are people in your life who depend on you financially, you cannot afford not to have some form of life insurance. Here's how it works, in brief: you pay your life insurance broker a monthly premium, and if you die during the life of your policy, your broker gives your dependents an agreed sum of money.
When you buy life insurance, you'll need to consider both the length and the size of the policy. Though the amount of cover you need will vary according to your dependents, at bare minimum you need cover enough to pay off your mortgage and other debts and replace at least some of your income. Realistically, cover of ten times your gross income (your salary before deductions) should leave your dependents debt-free and with a decent standard of living. In terms of policy length, it makes sense to cover yourself until your normal retirement age, usually 60 or 65.
An alternative to life insurance: Family Income Benefit (FIB). If you want to provide your partner or dependants with an income if you die before collecting your pension, FIB is a far cheaper alternative to life insurance. Whereas life insurance gives your family a lump sum, FIB pays them a tax-free income for a defined period. Buying FIB instead of a lump-sum policy could halve your monthly premiums.
A final note on wealth protection
Hopping back aboard the Grim Thought Express, even the savviest of insurance policies won't protect your family from all kinds of hardship if you haven't left your affairs in order. If you have possessions, family, insurance, or even just a parting comment, you absolutely MUST write a will and keep it current.Free special reports from The Motley Fool: