Back to basicsPosted on: 12 June 2014 by 50connect editorial
It appears that personal finance has never been sexier!
The financial advantages of the new pension revolution and property ownership are dominating newspapers on a daily basis. Headline stuff, along with England’s World Cup prospects, the early days of Prince George and Prime Minister David Cameron’s battle with the European Union.
Come April 2015, the new pension regulations will give financial freedom to a more extravagant life in retirement years – while the value of your house is soaring, if the frequent house-price figures are to be believed.
While the benefits of such investments are obvious, there is always the downside, the unexpected that can undermine such plans unless safeguards are put in place. Your independent financial adviser (IFA) has always explained the benefits of preparing for such setbacks.
We are talking about insurance, in all its form. It has always been regarded as a boring, if necessary, part of financial life. Currently, it appears out of favour.
In recent times, the scandal of PPI (Payment Protection Insurance) has given insurance a bad name as financial institutions have been fined millions for miss-selling a product that was next to worthless and unnecessary.
Unfortunately, whether its PPI or general apathy, the numbers taking out even basic insurance are falling. The consequences for individuals, families and businesses can be catastrophic if the main breadwinner or key employee dies, becomes seriously ill or has an accident and there is no insurance in place.
The loss of a loved one is bad enough, especially unexpectedly, but the added strain of financial strife can make the situation traumatic.
To be fair to financial institutions, many of whom have taken a real kicking in recent times, are trying to warn of the dangers of having no or inadequate insurance cover, in all areas of our life.
One of the problems created by the PPI scandal is the belief that insurance companies will do all they can NOT to pay out, or to delay the claim, or to make the whole process as tortuous as possible by keeping you hanging on automated telephone lines for hours.
The Association of British Insurers (ABI) have produced figures which show that of 102,394 claims made in 2013, only 3,457 were declined, indicating a 97% pay-out rate.
The ABI believes that recent initiatives such as a code of practice on disclosure have seen the % of claims declined fall from 8% in 2007 to 3% last year.
The ABI feels the need to highlight these figures after a survey by AEGON UK showed the public’s mistrust with protection insurance.
The AEGON results were startling. It found that 63% considering taking out protection were concerned about getting paid out if they claimed – and the 41% that were not considering a protection policy cited worries regarding getting paid out as the main reason for ignoring it.
The insurance industry pays out £8.4m every day in individual life, critical illness and income protection insurance claims.
It would have made sense as part of the recent implementation of the Mortgage Market Review (MMR) regulations to make life insurance mandatory for the person paying the mortgage.
Increased life expectancy has made such policies relatively inexpensive. As your IFA will demonstrate, the policy will offer genuine protection and security to all concerned – the individual, the family and the lender.
The cost of Life Cover and Critical Illness for couples aged 40 of £100,000 for 25 years can be as little as £18 a month; for Family Income Benefit for the same couple of £15,000 a year for 15 years the monthly premium is about the same.
The income protection for critical illness should not be ignored – figures show that you are four times more likely to be off work with a serious illness than die before retiring.
You need expert advice to make sure all the options have been considered. Some premium rates are fixed, others increase each year. Short-term income protection can be for a period of one, two or five years – useful if you have an accident, but not if you get a long-term injury or illness; yet it may suit for a short period as circumstances change.
It’s not just families that leave themselves vulnerable without insurance. Businesses, especially small and medium sized enterprises (SMEs), can be brought to a halt or hindered by the loss of the owner or a key employee.
A recent SME Risk Index by Zurich highlighted this danger area.
Zurich polled 513 senior decision-makers from SMEs – 56% believed the loss of the business owner was the biggest threat to the business’s success, and 45% felt the loss of a key individual was a major risk.
Yet, amazingly, despite being aware of the risks of a single death or critical illness, almost two thirds of SMEs had no protection insurance for their owners and key employees.
You have been warned. What price “peace of mind”? Your financial adviser takes no pleasure in pointing out what happens if you die or become seriously ill or have a bad accident. But that is the job - to make you aware of the potential consequences of the loss of your salary, your mobility or your life.
“Hope for the best, prepare for the worst” is no secret mantra; it is the watchword of sensible financial planning. How are you financially equipped to cope with the “what ifs”?
That’s the strength, value and purpose of insurance. Sadly, many only come to appreciate those benefits when the damage has been done!
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