What is protection or insurance? It’s ultimately an exercise in mathematics or risk management. There is a probability of A that B will happen and that will lead to an economic loss of C. To insure this, there is a monthly cost of D.
So if you are the main earner in your family, there is a probability that you will either die, have a critical illness or not be able to work for an extended period of time- worst case right up to retirement. This will have an economic impact on your dependents if you die, and yourself and your dependents if you survive but are unable to work.
There are two ways to cover this economic loss – 1) You pay it with your own resources, cash or by raising debt. Or 2) you can get an insurance company to pay it for you.
If you are wealthy and have lots of passive income and no debts, you are effectively self insured and may not need the insurance company’s help
If you don’t have the wealth, or you want to preserve the wealth that you have accumulated, you need insurance.
As a starting point, We need to work out the size of this insurance gap – with the use of cashflow modelling, or other calculators.
The great thing is if you are an employee for a big tech company for example, you probably have benefits and insurance already in place from your employer that covers these risks. But we need to work out what these are, what they cover and whether despite their existence, there is still a gap. It may also be worth insuring things like paying off your mortgage if you die, separately from your work, so that at least you know that this is covered even if you lose your job. Often these insurances end when your employment ends.
As part of a holistic financial plan, we work out if you have a protection gap or not. There is no point in making plans for the future when there is a risk that could derail everything. If you don’t cover the risks, your financial plans are built on sand.
If you want to have a chat about this or any other aspect of your financial situation, please book a call.
- This article is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
- Please note that the Financial Conduct Authority (FCA) does not regulate some aspects of cash flow, estate or tax planning or trust advice.
- Cover will cease on insurance products if premium payments are not maintained.
