By David Lamb CFP™ MCSI
Nobody likes to think about catastrophe scenarios such as death, serious illness or even losing a job. But failure to plan can be planning to fail and will subconsciously create nagging worries.
The first thing to do should be to create an emergency fund, which I discussed in an earlier blog.
What would happen if you were to die? Would your financial dependents be able to maintain their lifestyle without the fear of running out of money?
Life assurance of £100,000 may sound a lot of money, but is it enough? If your net income is £2,500 each month, it does not provide much more than three years of income. If you have a young family, they may run out of money.
If you were to die, would your family need a lump sum, or an income? Insuring for an income is usually lower cost than insuring for a lump sum. You are paying for something you do not want to benefit from, so get it as cheap as possible.
How did you arrive at your level of life assurance? A detailed shortfall analysis will help you calculate how much life assurance you may need. Cashflow modelling can help with this.
Will any life assurance go straight to your family, when they need it, or will it get delayed whilst probate is processed and are there any inheritance tax issues? Placing a policy in trust can help resolve these issues but careful planning and professional advice is essential.
What would happen if you were to suffer a critical illness? Often a first heart attack is nature’s way of telling you to slow down. Do you really want to have to rush back to work because you need to pay the mortgage? A critical illness policy could provide a cash injection that could be a life saver!
It is generally considered sensible to accumulate a pension fund so that you do not need to rely solely on a State pension in retirement. If you are incapacitated, without any income protection, you may need to survive on state benefits with far more financial responsibility.
Another important issue to consider – and one that most of us do not want to do think about our loved ones or ourselves – is losing mental capacity.
Many people think ‘it won’t happen to us, we’re fine’, but what would happen to your finances if this was to happen?
Effectively the Court (of Protection) comes along and puts a padlock on that person’s finances, and they and their family lose control of their money. Cheques can’t be written, money can’t be transferred and bills cannot be paid. A deputy is appointed and so starts a long and expensive process.
The key to that padlock is a Lasting Power of Attorney, but you can only buy that key when you have mental capacity. Once that is lost it is too late.
You can build your own cashflow model, for free, at lambfinancial.co.uk
If you do not know how much is enough, you do not have a financial plan.