Protection matters: Family protection

So far I’ve talked about income protection so that you can take care of your JOB. You probably have mortgage protection in place to protect your HOME. But there is one major aspect of protection that is less obvious, and it is protecting your FAMILY. The main idea here is to make sure your loved ones will be taken care of if you got hit by a proverbial bus.

Like any protection case, family protection considerations start with risk assessment. If there are just two of you, both working and able, family protection is not of great importance. But if you have children or dependants, family protection quickly becomes one of the most important things you can invest in. So let me tell you how I go around advising on family protection.

The first step is working out just how much protection you actually need. And the only way of doing it is sitting down and openly discussing what would happen to your family if one of you was here no more. (I sincerely recommend a glass of wine green tea or kombucha to go with this conversation, it is NOT fun). An example may sound like “If my partner died, I would need to reduce my hours and employ help. I would also want to make sure I can afford school fees without having to think about it”.

Once you got your “doomsday” scenarios worked out, you will need to turn them into hard figures. An example would then go like this: “I would need ￡X per year to replace lost income and ￡Y per year to pay for school fees, for the next Z years”. This should give you an annual figure of need.

Once you worked out your need you can select a protection option to suit your budget. Two main options are as follows:

1. Family Income Benefit (FIB) – this policy works off the annual need figure you come up with. FIB will pay your annual need in monthly instalments until the end of the term. The earlier the claim happens, the more will be paid out in total – in that sense, FIB is very similar to a decreasing mortgage cover.
2. Level term assurance (LTA) – this is a more expensive option, where a set lump sum is paid on death. The lump sum is calculated by multiplying your need by 25. This way, the family can invest the funds and take 4% annual income. Investment income should then cover the need, and the underlying capital will become a long-term “capital nest”.

As you can imagine, the first option is usually a lot cheaper than the second option. But using LTA will give you extra capital to use, and the payout will always be the same regardless of the timing.

If this sounds complicated, don’t worry, you are not alone – a lot of people find protection planning confusing. The good news is, a good financial adviser will talk you through all the tough questions, make it seems easy and help you find the most suitable solution.