By: Tim Bennett
11.07.2019
Long-term investors also need short-term emergency cover. Tim Bennett explains why and how to go about setting it up.
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How to rain-proof your financial plan
Before we start looking to the long-term, we should all make sure that we secure our short-term futures, not just for us but for our families. Here is a short guide.
Background
Investing is all about maximising our long-term wealth, but we can only do that once we have a plan incase, as my father-in-law once put it, “the roof falls in”.
A reminder
A sensible approach to financial planning is to divide our assets into three distinct pots, rainy-day funds, amounts set aside to meet foreseeable calls on our capital and lifetime savings (everything else, beyond our property). Here, we are focusing on the first of these.
Rainy day funds
These are the funds needed to cover a short-term cash call, such as the family breadwinner losing their job. Around 3-6 months of the typical family spending budget should be held in a liquid account for this purpose.
Insurance
Next comes the short-term protection a family may need if something goes very badly wrong, perhaps because a parent contracts a long-term illness, or even dies. There are three types of plan worth considering here, although whether they are all suitable is driven very much by personal circumstances. In all cases, a careful reading of any small print is recommended too.
There is a lot more to know about these policies but here are the bare bones.
Income protection
This is a way to replace all, or part, of your income over a defined period, which could be all the way until your expected retirement date. This could be useful if you are unable to work for a fixed period, or perhaps forever due to a sudden illness or injury.
With all such plans, do watch out for any exclusions and double-check the length of cover on offer.
Critical illness cover
These plans usually pay out a lump sum, should you succumb to an illness specified in the policy. This could be a way a family could clear a mortgage debt, for example, should something happen to a key income earner. Because these plans only cover a set list of conditions, definitions and exclusions must be read carefully.
Life assurance
These plans are designed to pay out a multiple of your income in the event of death. Employers often provide them under the badge of “Death in Service Benefits”. If you have such a policy, do check that it is adequate and if you are self-employed, or lose your job, bear in mind that you will not automatically be covered.
Rules of thumb
No-one wants to be saddled with expensive and unnecessary insurance cover. That’s why it is worth bearing the following points in mind before signing up to any plan;
To find out more
Sorting out the correct level of short-term “rainy day” protection can seem daunting. Feel free to contact one of our Wealth Planners to find out more or email me at the usual place: [email protected]
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