FINANCIAL PROTECTION can be summed up with the question “what if something should happen to me or my spouse?”
You need to understand the strengths and weaknesses of your existing financial resources before you can answer. So a review of what you have in place with your financial planner is the first step.
In the developed world, countries are facing the challenges of an aging populace where the over-60s are becoming a much larger percentage of the whole, putting pressure on social services and the tax burden of the working population. This is most acute in Japan.
One of the subsequent effects of this aging is that incidences of illness and, more importantly, critical illnesses are on the rise. As we get older we are much more likely to suffer from a serious illness than to simply die, putting both emotional and financial pressure on one’s family.
If the home keeper rather than the breadwinner should suffer a debilitating illness or even death then home help and childcare also would need to be funded.
The simplest and most effective way to cover for this is a Term Life and-or Critical Illness and Income Protection policy for a certain period until you are free of dependants (e.g. when children have grown up and left home). Here’s a quick rundown of these types of assurances:
Term Life: An insurance policy that pays out a lump sum of money if you die before a certain predetermined date. This can be 10, 15, 20, 25 or 30 years hence and depends on the length of time cover is needed. This type of policy is simple and premiums are quite inexpensive.
Critical Illness: One of the least understood forms of insurance. Individuals protect themselves in the event of a serious disease or terminal illness occurring before the age of 65. The costs involved to make adjustments in life can be substantial and the lump sum that pays out upon diagnosis is designed to protect the burden of such costs.
Income Protection: Often referred to as “disability insurance,” this type of protection seeks to provide a level of annual income in the event that an individual is unable to work due to a prolonged illness or temporary or permanent disability.
One other factor in deciding the type and level of cover you need in the event of your death is tax. Inheritance tax or death duties, can be crippling for a remaining spouse. There are plenty of insurance policies and trust arrangements that can be set up to mitigate for this future burden on your surviving family.
The usual way is to take out a Whole of Life policy that can have Critical Illness added as an optional cover:
Whole of Life: An insurance policy that pays out a sum of money when you die not if you die within a predetermined period as with Term Life cover.
Contributions are usually paid monthly or annually at a fixed rate. Part of the regular contribution (premium) is invested into a selection of funds that grow over time, and part of the premium covers the cost of the risk to the insurance provider. Whole of Life policies therefore generate an investment value over the long-term. If the insurance is no longer needed at a later date it can be cashed in for it’s current value.
As today’s society becomes more financially sophisticated, people have the tendency to place more emphasis on investments than securing the assurance that their families will be provided for if in times of need.
Consider your own arrangements and take steps to ensure that while you reap the benefits of your life now that the fundamentals of a sound financial plan are in place.