You may feel invincible now, but have you ever considered how you will cope financially if something goes wrong with your job or your health?
A key part of your financial plan should be to protect your current and future lifestyle. You do this already (because the Government forces you to) with your car insurance. This is because as a society we recognise that we should ensure that if we have an accident we cover not only our own expenses, but also those for which we may be liable. The same goes for home insurance. We all pay for cover just in case something drastic goes wrong. And of course, sometimes it does, and you are glad of the insurance cover to pay out to cover all those unexpected expenses.
Personally, I was burgled a few years ago. There was nothing much more that we could have done – all the doors and windows were locked, but we met with a determined burglar. The insurance gave us peace of mind that we were covered; and guess what, it paid out!
In financial planning terms, we are talking about protecting other parts of your financial lifestyle. This means covering against disasters such as long term illness, death, and unemployment. Think about each of these scenarios for a minute. How would you cope in the following scenarios?
Losing your job
Unfortunately, this is a real issue for millions of people at the moment, especially given the Government cuts. If you lose your job, you will need to rely on your savings (assuming you have some). Benefits won’t pay your much, so you need to rely on your own financial planning. You will still need to pay your usual outgoings, but your income will drastically reduce. Well, you can cover against this with a plan called unemployment cover. This will aim to pay key expenses such as your mortgage when you have been made redundant.
If you are too ill to work, either because of an accident or because of a serious illness, this will likely affect your ability to work. This could be for a short period of time, or could be for much longer. We all know of people who were struck down early by a serious illness, and who probably lived on less money afterward. Again, savings will only take you so far, so there are types of insurance which will allow you to cover your main expenses while you are too ill to work. These can either pay you a lump sum, or an income until you are well enough to return to work.
Some people do die before their time, so it is important to think about the effect that this will have on your family if you are not around to provide for them financially. Thankfully, this is rare, and so policies are cheap, but the real issue is the drastic effect such an event would have on the future prosperity of your family. We tend to find that most people are under insured in this area, since they under estimate how much cover they need. In many cases people cover their mortgage, which is a good place to start. But they do not also think about the other expenses that their family would need to cover if they were not around, and also lost that income.
In conclusion then, insurance should not be the prime focus of your financial planning, but it is an important element of it. That way, if you work out your requirements sensibly and based on what you need, you can ensure that your standard of living is protected no matter what happens.