When starting a family, there’s a huge checklist of items to purchase, but did you consider financial protection? It might not be as high up on the list as buying a pushchair or cot, but it can be just as important.
With a new family member, safety and protecting them is essential, from baby-proofing your home to purchasing a car seat that meets the safety standard. However, your income and health are just as important for their security. Yet, it’s something that is often overlooked by new parents.
Research from Aviva found that, on average, couples embarking on parenthood spent £1,645 preparing for the arrival of their first baby. But 57% said they’d purchased baby goods that in hindsight they could have done without. Among the most common items falling into this category were breast pumps, baby slings and cot mobiles, with an average spend of £134.59.
In comparison, little more than one in five have taken out a life insurance policy to ensure financial resilience against the loss of a parent.
Paul Brencher, Aviva UK Health and Protection Director, said: “Considering that buying your first house and starting a family are traditionally the most common life events that prompt the arrangement of life insurance, it is very concerning to see that nearly three-quarters of first-time parents are not protecting their families’ future financial wellbeing.
“Additionally, a large portion of UK adults have little to no savings that they could rely on to help weather the financial fall-out of an unexpected loss of income due to ill-health from a working parent.”
Making ‘what-if’ plans
As you start your family, you no doubt have plans in place. You may have considered how long each parent will take off from work or whether you’ll start a savings account for your child.
However, it’s easy for factors to knock plans off course and you may find that your priorities and goals change in the future. As a result, it’s essential that you plan for ‘what-if’ scenarios. It’s a step that can give you confidence in the future and provide you with a sense of security should something happen. ‘What-if’ plans may include building up a rainy day fund to dip into when the unexpected occurs. But what happens if your income stops for a long time? This is where financial protection can provide peace of mind.
There are three main types of financial protection to consider:
1. Life insurance
No one wants to think about passing away, but taking out life insurance could protect your family if you did. If you’re responsible for the main income in your household, your family may struggle without you. Even if this isn’t the case, financial challenges could still affect them. For example, if you provide the majority of the childcare, your passing away could cause family outgoings to rise.
Life insurance pays out a defined lump sum on your death. You can select how much your loved ones would receive, which will affect the premiums. It means you can tailor it to suit your family’s needs, such as how much would be needed to pay off the mortgage or expected school fees. It’s a type of financial protection that can ensure loved ones are financially secure when they’re grieving.
2. Income protection
While you may benefit from sick pay from your employer, how long does this last for? If you’d have to rely on Statutory Sick Pay, it’s just £94.25 a week. You hopefully have savings you can fall back on, but an extended period of time off work can quickly deplete these. If you’re unable to work due to an accident or illness income protection can help.
After a deferred period, which you can set, an income protection policy will pay out a defined amount at regular intervals until the policy ends, you return to work or retire. The amount paid out will usually be a portion of your salary, say 70%. It’s a policy that can give you peace of mind as you recover and ensure you’re able to continue to meet financial obligations.
3. Critical illness cover
Every year thousands of people in the UK are diagnosed with a critical illness. It can mean significant changes to life, plans and work. During this time, it may be necessary to take time away from work or, in some cases, retire before initially planned. It can place finances and wellbeing under stress.
Critical illness cover will pay out a lump sum on the diagnosis of an illness that is named in the policy. It can give you the space to come to terms with what a diagnosis means for you without having to worry about immediate finances. You can choose the level of cover you’d receive to fit your lifestyle and commitments.
Writing a will and naming a Power of Attorney
In addition to financial protection, there are two other steps you should take to secure your families finances.
The first is to write a will. A will is the only way to ensure your assets are passed on according to your wishes. Without a will, your estate will be distributed according to Intestacy Rules, which may be very different from what you want. This can be a particular issue for couples that are co-habiting, as their partner would be excluded from inheriting under Intestacy Rules. In addition, a will can also be used to assign a legal guardian for children should something happen to parents.
Despite this, 52% of parents haven’t prepared this vital document. It’s an oversight that could leave loved ones in a vulnerable position should something happen.
Second, you should name a Power of Attorney. This names a person you trust to make decisions on your behalf should you no longer be able to do so, following an accident or illness, for example. There are two types of Power of Attorney, one covering decisions relating to your health and wellbeing and the other focusing on your financial affairs. This can provide your family with security.
Even if you’re married or in a civil partnership, your partner does not have the automatic right to access your bank account, for example. If your income or assets are essential for day-to-day costs, not being able to access this could place your family in financial difficulty.
Please get in touch if you’d like to talk to a financial adviser about the steps you can take to protect your family.
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