Preparing for Rain
Someone once said that the shortest recorded period of time
lies between the minute you put some money away for a rainy day
and the unexpected arrival of rain. Unexpected events in life
can trip us up financially, making our life goals unattainable
and destroying some or all of the savings we have made to
achieve them. If you already have a large amount of debt and you
suffer an unexpected loss, the consequences can be tragic. But
even those who have a good track record of putting money aside
regularly can find themselves in dire straits if they have not
protected their savings.
Risk protection is an often overlooked aspect of wealth
creation. If you create wealth and don’t protect it then quite
simply you may well lose it. To put in place a risk protection
strategy you must first ask yourself what your risks are. For
most people, the risks that may erode wealth are the risks of
premature death of a family member, traumatic illness or loss of
income through illness or disability. The next step is to try
and put a dollar value on the amount of risk involved. The best
way to do this is to ask the question “What amount of money
would I need for myself and/or my family in the event of a) my
premature death b) a traumatic illness c) illness or disability
that leaves me unable to work for an extended period?” For
example, in the event of your premature death you may wish your
partner to have a mortgage free house, no personal debt and a
regular weekly income until such time as all your children are
at school.
Having quantified the risks in dollar terms, they can then be
covered by taking out insurance. Obviously, insurance has a cost
and this is where your ideal solution of insuring away all risk
is generally defeated by the harsh reality that the premiums are
too high to be affordable. Prioritising your risks helps to
identify the most important areas to cover within a limited
budget. You may also choose to “self-insure” or in other words
to take on part or all of a particular risk yourself. One
example of self-insurance would be taking out medical insurance
to cover the costs of surgery but not to cover the cost of
visits to your GP. Similarly, income protection insurance
premiums can be lowered by increasing the “stand down” period,
which is the period of time you must wait before the benefit is
payable. As a general rule, it is better to reduce premiums in
this way rather than by reducing the cover or other benefits.
When checking out the market for insurance cover, it is
important to ensure that you understand the product you have
enquired about and that you are comparing apples with apples.
Most insurance “nightmares” result from misconceptions about the
insurance cover that has been purchased. It is important to find
a product that is appropriate to your needs and it is a good
idea to obtain professional advice from a qualified adviser. You
must be absolutely clear what you are covered for and what you
are not covered for. Your adviser has a responsibility to ensure
that you understand this.
There is a recent trend for insurance to be sold by telephone
call centres (on an 0800 number). With this type of selling, it
is more difficult for the salesperson to truly understand your
requirements and the onus is therefore on you to read the fine
print and be aware of what you are buying. While the deal may
sound cheap, it may also be inappropriate for your needs.
Unfortunately, it may not be until you make a claim that this
becomes obvious and by then it will be too late. There are
numerous competent brokers in the marketplace who will find a
product to match your needs at an affordable premium. Generally,
there is no charge to the client for this as the broker receives
a commission from the insurer. Insurance won’t stop the rain,
but it will give you a protective cover to keep you dry.
