This month Mitch Hopkinson, a winner of the Financial Adviser, a Financial Times publication, ‘UK Independent Financial Adviser of the Year’ award, explains the importance of life insurance as the basis for a solid financial strategy and to secure protection for families left behind.
It used to be in a shed at the bottom of your garden, but now?
One of the biggest concerns I have for my clients and the population is general, as an adviser, is the fact that most people don’t ever take the time to evaluate how much they are worth.
The foundation for solid financial planning is to ensure that you and your family are properly protected in the event that something terrible happens to you. This should be properly addressed and resolved first, then other financial planning objectives can follow on.
Most people have adequate car insurance, because it is not legal to drive your car without it. Most people’s houses are insured, because your mortgage would not have been granted without you having it in place. But ask yourself if you and/or your spouse are insured properly given that you earn the money to pay for everything in your life.
In order to illustrate this, as advisers we would (in the past) ask our clients to imagine that they had a shed at the bottom of the garden, in it was a machine that regularly produced items that you could sell for a profit and make say £2,000 per week. If you had a machine like this how much would you insure it for?
The purpose of doing this was to show the value of something that produced money, so that it would graphically show the need for insurance for the income that was actually being produced for the household. Stripping away the emotion of asking people about how fragile their life might be, was a good way to highlight the need for insurance. So how much insurance should you have?
One of the first things to do is to work out how much you are paying for insurance on your car and your house, I bet your pets are insured too. Find out what all that is costing and then think that this is a cost you were willing to pay for something that only exists because you pay for it… this should give you an idea of the minimum budget for insurance for you, to protect the most important thing in your life. YOU.
If you have dependents who rely on you, then you definitely need to have life insurance. But let’s be honest, it is death insurance because it only pays out when the life insured dies. At the very minimum you should have enough death cover in place to pay off all of your debts, and you should probably look to have a replacement income that pays out for as long as your dependents will rely on you. The cost of life insurance for healthy people in the UK is really cheap, so there is no excuse not to take it out because it is expensive. In fact it is ludicrously cheap. The facts are however, that according to a survey in 2013 only about 27 per cent of people polled in the UK actually have life insurance. So why don’t more people have life insurance, if people should be insured and the cost of having it is inexpensive there is no real reason why people should not have more cover.
A 35-year old man or woman would pay about £35 for £1m of level term cover for 25 years. A joint policy would cost £59.54, but I would always advocate taking cover as two individual policies since this would provide double the cover, but as you can see it is not double the cost.
The main reason for not having the cover I really think is that most people are blissfully unaware of the need for the cover in the first place as they don’t like to think that they are going to die.
So what are the statistics? Essentially it is about one in 1,200 for men in their 20s and 30s, and for women about 1 in 2,400. This gets worse for people in their 40s it scales back to about one in 600 for men and one in 1,200 for women.
Taking out death insurance is a true act of altruism as it will not ever benefit you, it will however transform the lives of those you leave behind. But you should not stop there, you should be selfish and protect yourself properly against serious illness. The fact is that serious illness is far more likely to happen than premature death.
Recently, cancer statistics were altered to show that there is a one in three chance of a person contracting cancer in their lifetime. So ask yourself this question, how long would you be able to continue with your life and how would those around you cope if you could not work because of long term illness? With these statistics it is almost impossible to ignore the need for cover. In particular, make sure that your mortgage and debts are protected against you contracting a serious (critical) illness.
Because the likelihood of this happening is higher the cost is higher too, on the same basis as above the cost increases to £182.12 per month for both life and critical illness cover. However, most people won’t need as much cover. These plans are best taken out to include life insurance as it is often more expensive to have two policies, one for life cover and one for critical illness cover.
Please take some time to check how long you would continue to be paid in the event that you could not work. How long would your employer pay you for? If you don’t know, find out. When you know how long, consider protecting yourself so that an insurance pays out after your employer stops paying you. This should be up until your retirement age. And don’t forget to check your retirement date, it probably won’t be 65.
So rather than a shed at the bottom of the garden, imagine someone offered you a website that generated for you and your family £2,000 per week, how much would you pay to ensure that the server never went offline.
Now compare that with the cover you have in place to protect you, in case you ever go offline.
Mitch Hopkinson is a managing partner of deVere United Kingdom, part of the deVere Group, one of the world’s largest independent advisers of specialist global financial solutions to international, local mass affluent, and high-net-worth clients, through a network of over 71 offices across the world and more than 1,000 staff. It has in excess of 80,000 clients and $10bn under advisement.