Building Your Protection Portfolio
Protection and insurance are aspects of Financial Planning, which people can find uninteresting, confusing, and expensive. Protection planning does not come across as attractive in comparison to, investing and pension funding, to many. While Saving/Investing & Retirement Funding are important component parts of financial planning, they need to be married with sufficient protection planning in order to balance the overall Financial Plan. Throughout this piece, I will try to illustrate the benefits of a well balanced protection portfolio as part of your financial planning. There is different protection plans, which provide different and unique financial protection, in their own right. Often, people can feel different types of policies are being sold to them and that they may end up having several direct debits paying different policies which they have not been fully informed and do not completely understand. The common questions or statements of “I have specified illness cover, why would I need Income Protection?” or “We have life cover for the mortgage, we don’t need more life cover”. Engaging with your protection planning and understanding how different protection planning, covers you against a diverse range of risks rather than just one.
Of course, budget is the most important aspect to protection planning, the protection must be appropriate and sustainable, Therefore, if your budget is 150 per month for Protection, simply taking out life cover only for 150, means you have only protected against one risk, albeit a crucial one especially if you have young dependants. However, using the budget to put together the most diversified protection portfolio within your budget, can provide a much stronger level of protection against risks which come from different directions. For example life cover with an Income Protection Plan also, means you are protecting against premature death and an inability to work, 2 completely different scenarios. This example will be expanded upon below. Rather than a brochure on each plan, knowing what each policy offers, it is crucial to know what it doesn’t offer and does it achieve your protection priorities.
Priority based Protection Portfolio
Establishing, your financial planning priorities, is the first step to assembling an appropriate Financial Plan. Engagement with your financial goals and the provisions needed around these, is crucial. However, knowledge of the risks posed to those financial goals and how to put the the relevant risk management in place, can make this plan more robust and your financial well-being more secure.
The common question which is asked is Serious Illness Cover versus Income Protection or mortgage protection being in place and is there a need for more life cover. The key is, understanding the unique elements of each plan, prioritising them and balancing the protection portfolio within the respective budget.
So as a case study example below: David & Anne are in their 40s and have 3 children, under 8 years of age. Clearly, there is a need for risk management in their financial plan. They’re both working earning a similar income. Outgoings are quite high, with the mortgage, utility, car loans and costs related to the 3 children and running of the household. They’re financially stable, as both David & Anne’s income sustain their lifestyle and they have enough each month to save a portion of their fund in a savings account, which they envisage to be the third level education fund for their 3 children. The life blood of their family’s financial well-being, is their ability to earn and provide an income. In terms of structuring the protection portfolio, a combination of death and living benefits are essential in establishing a robust diversified protection portfolio. This must be a dual spouse approach, as both incomes are at the same level and both are needed to sustain their financial well-being.
- Mortgage Protection – Life Policy to cover greatest financial liability, if one of the spouses dies prematurely. Cover can remain level or decrease in line with the mortgage.
- Independent Life Cover – Life Cover independent of borrowings. Cover which is independent. Replacing the income of the spouse, in a lump sum. Can provide financial peace of mind in the most traumatic of times. Financial worries on top of grief, can be extremely detrimental, independent family protection through life cover protects the surviving spouse and children, financially with a lump sum pay-out.
- Income Protection – Often many will feel that with part 1 and 2 the protection planning process is completed. The characteristic of the protection plan, is vital in assessing the risk’s you have covered. Life Cover, insures against the greatest risk to David & Anne’s financial well-being, but this is one risk. It is a death based, benefit. I mentioned above the importance of living benefits, within a well balanced protection portfolio.
Income Protection, involves insuring your income/salary in case you’re unable to work due to accident/injury or illness (mental or physical). David & Anne may develop an illness or have an accident or injury which prevents them from working, an Income Protection Plan pay them a replacement income (after their deferral period has elapsed), until they’re able to return to work, thus providing a financial cushion, in a difficult time personally and financially. This replacement income can sustain the family’s financial well-being and make sure fixed outgoings are met. At the outset we identified, David & Anne’s incomes as the key asset in maintaining their financial well-being. By having Income Protection in place, coupled with life cover they have covered the risk of being unable to work and of premature death. Clearly, this means their protection portfolio is stronger as they have insured against more than one risk and in doing so insured against a risk which is considerably more likely to occur.
4. Specified Illness Cover – This policy protects against diagnosis of a Specified Illness, covered under the plan. This policy is a one off lump sum payment, tax free. This plan can often be compared to Income Protection, but they’re totally different. They provide a different type of cover, one is a replacement income one is a lump sum payment. Specified Illness can provide a financial buffer, if diagnosed with an Illness such as Cancer. It can allow a person to take the necessary time off and manage some of the direct and indirect expenses of being diagnosed with a Serious Illness and provide financial peace of mind at what can be a very troubling time.
The core of the point, is to diversify your protection plans, within reason. Proper prioritisation and engagement with what you want to insure against and making sure the protection portfolio marries with these. The more risks insured against, the greater the level of protection.
Maximising value in the Budget
Of course, a protection portfolio must be appropriate & sustainable, a key consideration when deciding on protection benefits, is the available budget. This is where cost and value come in. If for example the budget for protection is 100 euro per month or 200 euro per month, best practice is to get the best protection within this budget. Rather than using 100% of it for life cover, spreading it across life cover and income protection and if possible specified illness cover, can leave you and your family with more protection overall. You may have a lower level of life cover but you have insured yourself against passing away prematurely or being unable to work and earn an income, by using a portion of the budget to put in place Income Protection. Getting more value for your monthly premiums, it is not another direct debit it can be totally different protection plan and a crucial part of your protection portfolio. It may not always be possible, to have more than one plan and perhaps one plan is the only option sustainable, at the outset. Sustainability is key, but when affordability exists, maximum protection and value within the budget should be the goal.
Tailored Protection Planning
As outlined above, the importance of your protection portfolio being tailored to suit your budget the same applies to your financial circumstances. The case study above, looked at a couple with young dependants, both parent’s working. The shape of this may change if only one parent was earning an income, more protection on that person through life cover and only one Income Protection plan would be in place, to insure the key income earner. Also, a couple who may not have children, would focus their portfolio on living benefits and possibly a lower level of life cover for premature death. A younger single person, may be renting or have a mortgage and have significant monthly outgoings and Income Protection balanced with some Specified Illness Cover would be the most appropriate protection plans for them.
The process, depends on engagement. Proper prioritisation and risk management can mean your protection portfolio is stronger and more diverse thus providing more lines of defence for your financial well-being against the risks posed to it. Spreading the protection within your budget can leave you with a diverse plan which is sustainable and knowing what you have in place and why you have it in place.