Money Management Tristan on 03 Mar 2009 11:05 am
How To Protect Your Financial Security
We regularly write about how to achieve financial freedom and ways to earn extra money in your spare time and other related subjects on this website, but we don’t always focus on some of the more humdrum stuff, like how to protect your assets once you’ve acquired some. This article should be a useful guide to either self employed or employed people looking to secure their assets and thus their financial future.
Income Protection
It doesn’t matter if you are employed or self employed, you can still buy insurance to protect your income from accident or long term sickness. However, if you are employed, you can also buy unemployment insurance, which can be used to provide you with an income in case you get made redundant – it won’t payout if you get fired though!
Debt Insurance
If you own your own home with a mortgage, it is very important to take out life insurance, though really in this instance it should be called debt insurance, as it is taken out to repay the debt in the case of your or your spouse’s death. Like all protection insurance, it is cheapest when you are younger, so if you anticipate trading up the property ladder, buy more life insurance than you need now or simply buy on a level basis.
Life Insurance
You should protect your and your spouse’s income in the event that either of you died before pension age. To do this, purchase life insurance in a lump sum equal to your income, less the cost of mortgage (assuming you have debt insurance), divided by a realistic rate of return on safe investments (5% - 10%). This will provide yourself and your spouse with enough money to maintain the existing standard of living should either of you die before retirement age. You can do this with a whole of life policy but it can be much more expensive and you are committed to paying for it for the rest of your life.
Critical Illness
You may become ill at some point, but not die from the illness, in which case all the other insurances so far would not cover you. In this instance, it’s worthwhile taking out critical illness insurance, such that you will receive a lump sum to help with mortgage payments, hospital bills or changes to your accommodation should you be wheelchair bound for instance.
As this insurance is very expensive, it’s usually prohibitive to take out enough to cover your entire mortgage liability, so just take out what you can afford or think of a figure that would be useful to have to help with a life changing illness (£25k - £50K is fairly typical).
