Protecting your finances

Why don’t all clients want to talk about protection? What does protection as an overarching concept cover? Do we have a psychological bias towards talking about the good stuff; the plans, accumulating wealth, helping children and grandchildren. Insuring our cars, homes, even our mobile phones has become standard practice, but an alarming number of adults do not have enough life insurance cover [1]. So why avoid getting into the dark corners of what can go wrong within a financial plan and protect that too?

Our mission at Saltus is to improve our clients’ relationship with their wealth. To do this we work on identifying what is intrinsically important to them and what sort of lifestyle they want now, and in the future. Then we build a plan to show them what their financial future looks like and help them manage their assets in line with this plan.

This is all well and good, but what if the worst happens and someone passes away? Or, what if one of the household members gets so ill that they cannot work and needs someone to look after them?  Often when we have these conversations with clients, we get verbal acknowledgement they understand the importance on protecting against such events. But all too often taking the required actions is not seen as an immediate priority, and our clients want to revisit it as part of a later review.

Why is protection so important in the context of financial planning?

Financial protection is a crucial aspect of comprehensive financial planning, serving as a safeguard against unforeseen events that can jeopardise financial wellbeing. Examining the significance and importance of financial protection involves delving into the reasons as to why it matters, and the difficult “what if” scenarios to try and establish priorities.

Life is, of course, unpredictable and various risks such as illness, accidents, or the death of a breadwinner can significantly affect a family’s financial stability. Insurance policies play a crucial role in protecting individuals and families from the financial fallout of these unforeseen circumstances.

Consider the case of a family where the primary earner suddenly passes away or gets so ill that they are no longer able to work. Without proper protection in place, the remaining family members may face immense challenges meeting their financial requirements. In this instance, life insurance acts as a financial safety net, providing a lump sum or periodic payments, ensuring the family can maintain their standard of living despite the loss of income.

To give you a real-life example, John and Jill have come to us for retirement planning following John’s redundancy at age 58. They are wondering if they have enough to retire now. John is 7 years older than Jill and has a final salary pension which will commence at age 65.

Modelling has shown John’s final salary scheme, plus their future state pensions and income from their other pensions and investments is more than sufficient to cover their expenditure. We could stop there, but it is important to ask the difficult questions, such as “what happens if John passes away sooner than planned?”.

In this case, it would mean Jill only receives a spousal pension of 1/3^rd of the final salary pension John would get, if he were still alive [2]. Additionally, his state pension would not be paid. Looking at Jill’s lifestyle plans and bills, the household expenditure would only be slightly lower.

Simply put in this scenario, Jill would not have enough money to meet her required lifestyle until she reaches her state pension age (67), at which point she should then have enough money coming in.

Following this modelling and the difficult conversations, we have agreed to insure John against early death up until Jill’s state pension age. This means they both have the peace of mind not only that they know what their financial future looks like, but also there is some protection in place for Jill if the worst were to happen to John.

What about wills, powers of attorney and expression of wishes?

Legal protection is another crucial facet of comprehensive financial planning. Estate planning, including the creation of wills, and possibly trusts, ensures the orderly distribution of assets after an individual’s death. Power of attorney can also be an important way of granting someone you trust the legal authority to make decisions about your finances, health and care, should you lose the capacity to do so yourself [3]. Without proper estate planning, legal complexities and disputes among heirs may arise, potentially jeopardising the intended distribution of wealth and causing financial strain on surviving family members.

For example, Bob became a client 10 years ago. Although unmarried he lived with Mandy, his long-term partner.  At the time, Bob’s main priority was finding someone to help him with his investments. From the outset we asked if Bob and Mandy had valid wills. The answer was no, so we highlighted the vital importance these played in ensuring their assets passed to those intended [4]. We even mooted the idea of Bob and Mandy getting married or entering a civil partnership to try and give one another further protection.

Unfortunately, this did not happen. Despite regular reminders, Bob neither wrote a will, got married or entered a civil partnership with Mandy.

We received a call from Mandy one Christmas who told us Bob had suddenly passed away. A friend had then reminded her under the laws of intestacy, Bob’s brother would inherit his entire estate. As you can imagine, Mandy was distraught, and it is a huge understatement to say she was upset Bob (nor her) had not taken these parts of our advice more seriously.

Fortunately, in this case, Bob did complete an expression of wishes form in favour of Mandy in relation to the pension fund we managed for him. An expression of wishes form tells the pension trustees what the member wants to happen to any residual pension fund should they pass away. This form meant Mandy did at least get Bob’s pension fund to help her.

Are there any other areas to think about?

Protection in financial planning also encompasses the creation of appropriate emergency funds. An emergency fund acts as a financial cushion, providing a readily available source of funds to cover unexpected expenses or income disruptions. For instance, if an individual loses their job or faces a sudden major expense, having an emergency fund can prevent them from resorting to high-interest debt or liquidating investments at inopportune times.

Business owners also recognise the importance of protection in financial planning. Business insurance, including liability coverage and key person insurance, shields businesses from various risks [5]. For instance, key person insurance compensates a company for the financial loss incurred due to the death or disability of a key employee, ensuring the business can navigate such disruptions without significant financial repercussions.

Conclusion

The significance and importance of protection in financial planning against life’s uncertainties cannot be overstated. Through insurance, emergency funds, legal documents, and risk management strategies, individuals and families can fortify their financial foundations, ensuring resilience in the face of unforeseen events. These areas of planning are not mutually exclusively. Instead, they are complimentary, and each one can play a part in protecting your plan.  Furthermore, for a financial plan to be fully comprehensive it should consider the hard conversations around protection however uncomfortable a topic. This is not only prudent to protecting assets and achieving long term financial goals, but it is also a proactive approach to maintaining financial wellbeing as you navigate the unpredictable  journey which is life.