We all know how important it is to have insurance policies in place to protect us from unfortunate events, but what may not be so obvious is the need to review the level and term of your cover regularly to ensure it is still sufficient for our ever changing lives.
For example, a person may take out a life insurance policy early on in life when they are earning less and have just a partner to protect, no children. At that time they may have taken out just £50,000 over 20 years. Fast forward 15 years, and that same person could be earning a much higher wage, have three kids, and a sizable mortgage which has another 25 years to run. That life insurance policy they took out originally is going to be of very little use now, as it will only have £50,000 of cover with 5 years left to run.
Simply just having a policy is not enough, you need to ensure the amount of cover is appropriate. You wouldn’t insure a Ferrari for £1,000, so you shouldn’t under-estimate your own value either. Obviously you can’t value yourself in the same way as a car, a person’s life is invaluable, but you need to try and put a figure on how much you would need to protect your family, and over a suitable term.
The most common figure people insure themselves for is their exact mortgage balance. This is a good start and should be the very minimum you consider if you are working with a tight budget, but it doesn’t give you the full protection you need. Your mortgage payment is just one of your families many outgoings, so why only protect that one? Your dependants’ costs, other debts, and general costs of living need to be protected too.
There is usually a balancing act between how much cover we would like to have, and how much we are willing to pay, but finding that right mix is an important part of planning your finances and should be given much thought.
Jason Hinde FPFS, Cert SMP – Chartered Financial Planner
21st November 2016