Does your family have a safety net?
Posted: Saturday 8 May 2010
You could say that when you have children, you will always be worrying about something whether they are 5 months or 35. Do they need another blanket in their cot, are they enjoying their swimming lessons, will they choose a career which is right for them, have they got home safely from the pub? It is simply part of being a parent that you want to make sure they are always protected.
It is vital to make sure that you have a plan in place to deal with any legal and financial issues should you or your other half die or be unable to work. This would allow your family to continue their lifestyle in what will be possibly quite traumatic circumstances but also allow you to still give your children a helping hand financially in the future with education, buying their first car/flat or funding a wedding.
What do you need to review?
Will
Do you and your other half have adequate wills to deal with your assets and protect your children if one or both of you die?
Power of Attorney
If you were not able to deal with your bank accounts, property, investments and anything else ‘financial’, then have you appointed an attorney who can do this for you? Often people think that you only need a Power of Attorney if you are elderly. If you suddenly became ill, or had an accident and were unable to give instructions then your family would need to apply for a guardianship order which is an expensive and time consuming process at a difficult time. A simple Power of Attorney will mean your family can begin looking after your affairs very quickly.
Budgeting
Have a look at your bank accounts for the last few months and make a list of your approximate outgoings. Then work out 1) essential monthly outgoings (mortgage, food, childcare, utilities etc) and 2) annual outgoings (for example, car and home insurance, holidays, travel, birthday/Christmas presents and clothes). This should give you an idea of what your current outgoings are compared to your income and then, crucially, where you could make savings if you needed to.
Emergency Fund
If you have little excess income then it may be hard to build up an emergency fund but you should try to have something set aside to meet unexpected costs or to help if your circumstances changed. Having worked out what your ‘essential’ outgoings are, you should try to have about 6 months in reserve in an easy access bank account.
Life Cover
What would be paid if you or your other half died and who would the policy pay to? This may be a policy you have taken out or one provided through your employer (a death in service benefit). If your mortgage and other debts are paid off then your family would have some financial security, and be able to maintain their lifestyle, have holidays, live in the same house and keep up school fees. The surviving parent might also, depending on the cover you have taken out, be able to reduce their work commitments to help the children (and themselves) through a difficult time. A life policy may pay as a lump sum or could provide an income possibly tied in to when the children have finished education. How much life cover you need will depend on what else you own.
Critical Illness (CI)
Statistically we are more likely to suffer a CI than we are to die before retirement. Cover can be slightly more expensive than life cover and providers may want a lot of information about your medical history. Getting a policy in place while you are younger and healthier is always going to be easier. CI policies pay out a lump sum if you are diagnosed with a specified conditions such as cancer. Not a cheery thought but more than 1 in 3 of us will get cancer some point. Some policies have a shorter list of conditions, some have a longer list but may only pay out a proportion of the sum assured if the condition is ‘mild’. If you became ill and are covered by a CI policy then it can pay off your mortgage, pay for care, give additional capital for security, allow you to adapt your home if required and allow your other half to reduce working hours to be with you.
Income Protection (or Permanent Health Insurance (PHI))
A PHI policy may be taken out or might be provided by your employer. This maintains income for your family if you cannot work due to illness or injury. It will not start until usually about 6 months so an emergency fund is important to tide you over. PHI will pay a proportion of your previous salary/earnings but not the whole amount so working out what you need to live on is essential. If you are unable to work then a mixture of an adequate emergency fund, CI cover and PHI will go a long way to giving you financial security in this event.
Pulling it all together
If you work out your essential living costs, and then what cover each of you and your other half would have if one of you died or was unable to work then you will be able to identify any gaps. You may have a good benefits package at work at the moment though should remember that if, in the future, you leave your job, your new employment package may not be as good and, depending on your health, you might not be able to get cover easily. You should also review the details of any existing cover to check it is appropriate and the premiums to make sure that they are competitive.
What next?
Once you are happy that you have a plan in place to cover the ‘worst case scenarios’ of death, injury and illness we can look on the bright side and plan on the basis that your future is rosy. The aim is financial security and peace of mind. If you know that you have everything in order then you only need to worry about the day to day juggling of family life, work and being a taxi service for your children’s’ social activities (which are probably better than your own!).
For further information please contact Sarah McKinlay.
