The Importance of Protection

Over the years one particular area of financial planning that always seems to be neglected or pushed way down the pecking order is personal protection.
As people look to build up wealth for the future, or in these times of austerity and recession simply look to get by in the shorter term, few really consider the impacts of the death of or serious illness to not just the main bread winner, but the partner/spouse in the family, without whom the main family earner could probably not go out to work.

It is a common mistake to financially undervalue a non-employed spouse or partner. If they were to die unexpectedly, the surviving parent may need to either change to part time hours, or even give up work altogether to look after the children, or at least find the money to pay for childcare. Either way this could prove very expensive.

Back in October 2009 research carried out by Swiss Re suggested there was a £2.3 trillion gap between the protection cover that people need and the protection that they actually have in place. At the time, UK chief executive at Swiss Re, Chris Thornton said; 'Eleven million people think they have enough insurance cover to protect them if they became sick in the work place', he added, 'my own calculation is that this is three times the amount of people that actually have cover.'

Mr Thornton further commented at the Association of British Insurers (ABI) savings conference, that both providers and the Government needed to improve the way they communicate with consumers to boost protection coverage. In short, without suitable protection in place, death or serious illness in a family can seriously affect its financial wellbeing.

The insurance industry covers most risks; from protecting a mortgage, to serious or critical illness cover, to short or longer term ill health when you cannot work. In addition, you could consider Private Medical Insurance if you wanted to avoid lengthy NHS waiting lists in some instances, or even provide cover for dental treatment.

Even after you decide what type of protection you require, it is vitally important that it is correctly set up, so that it meets your own personal circumstances. Careful consideration also needs to be given as to the appropriate level of cover.

There are numerous shortfall calculators on websites which help you reach a decision on the level of cover you should establish, but before doing anything I strongly recommend that you speak to your financial adviser to avoid a number of potential pitfalls. Setting up protection cover in the wrong way could have serious implications for other areas in the event of a claim. For example, I frequently come across substantial protection policies that are not written under a suitably worded trust, which in the event of a claim could add to or even create an Inheritance Tax problem.

Other protection plans might include valuable options which are often overlooked when being arranged directly by individuals. Even the way claims are paid can differ, so take the time to obtain good independent financial advice to help guide you through the protection maze and to make the right choices.

Investment values can fall as well as rise and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Neil Davis
Financial Planning Consultant

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