William Godsave of Credo, our wealth management partners, highlights the importance of having enough insurance cover to ensure you and your family are protected, should any risks occur.
There are some risks, such as short-term volatility in investments, which we may need to accept, but manage through diversification. Other risks, such as care home costs, we prepare for by setting aside adequate funding whilst trying to stay healthy. However, there are some risks which could be so catastrophic that they should be transferred to an insurance company. For most working families, the biggest one of these is the risk of unexpected death or serious illness.
Despite this, we tend to find that this is the area that people spend the least time thinking about (either because it’s not particularly glamorous or too morbid); but it’s no good having a plan if a one-off event outside of your control can completely derail the strategy.
We’re not going to spend time highlighting the importance of life cover: most of us understand this. Instead, we are going to look at the part which most people don’t spend enough time thinking about – how do I know if I have enough insurance cover?
How to know if you have enough cover?
Whilst there is no “right” way to approach this question, there are wrong ways, and let’s start with those. We recently met a private equity executive who had just been promoted to partner. He came to us needing life cover, and was thinking £1m of cover was adequate.
We asked him how he reached that number, to which he said: “that feels like it’s enough”. We had to remind him that he earns £300k net of tax and spends £250k per year, so that would last his wife and young children precisely 4 years… perhaps he needed a little bit more.
There are two main ways to approach the question of “how much cover do I need?” – and these approaches apply in a broadly similar way to both life and serious illness cover:
- Top-down approach
You start by quantifying an amount that would put you and your family back into a position that you would have been in, had you not died or become ill. For example, if you were expecting to earn £100,000 net per annum for another 15 years, your starting point is to ensure this income is replaced in the event of death or long-term illness.
From here, you can calibrate the amount down (or up) depending on specific circumstances and affordability. Perhaps you are happy to use existing savings to cover expenses, maybe you would downsize the house to release additional capital, or you may be willing to leave a smaller legacy to your beneficiaries than intended. - A bottom-up approach
The alternative is to start from the bottom up; identify your essential expenses and outstanding debts and ensure these are covered as a minimum.
From there, you can calibrate the amount up (or down) – for example, additional amounts may be needed for retirement savings, you may want to incorporate planned gifts and legacies to beneficiaries, or more support may be needed at home.
Whichever of the above approaches you take, the end result should be similar: an amount which is appropriate based on a balanced and evidence-based analysis of your specific situation, rather than “gut feel”, which is typically what we see.
Case study: How we recently helped an Insurance Director
We are currently working with a Director in the Insurance sector to formulate his financial and investment plan. When we got into the insurance protection part, he said that we could skip this as he had, in his own words, “great benefits at work”.
After reviewing the documentation, we confirmed that his workplace death in service was 8 times basic salary and he had income protection (for long term sickness) of 50% of his basic salary to age 65.
His workplace benefits were very good but the problem was his remuneration, as it was heavily weighted towards his bonus (typically receiving a bonus of up to 150% of his basic salary). This meant that the amount he and his family would actually receive was significantly lower than what he first expected.
Following this, we used a cash flow modelling analysis, using the principles outlined above, to identify and consider various scenarios for insurance cover based on his specific position, and ultimately recommended he take out:
- A life insurance policy to provide his beneficiaries with a tax-free income on his death, to complement the lump sum life cover at work; and
- An income protection policy to top up his existing ill-health benefits to ensure he received a continuing income if he was not able to work.
We prefer to use a modelling analysis to help our clients visualise and evaluate their insurance needs, but whatever method used, we ensure it is based on sound principles and methodology, as this is one area of your finances which you don’t want to get wrong.
If you would like to discuss your current position in relation to protection in the event of death or serious illness, please get in touch at credo@pkf-l.com.
Important notice
This marketing material has been prepared and issued in the United Kingdom by Credo Capital Limited (“Credo”). It is provided to you for discussion purposes only and does not constitute and should not be interpreted as either investment advice (including legal, tax or accounting advice) or a trading recommendation. This marketing material is not a solicitation to buy or sell any financial instruments or commodities, a recommendation to participate in a particular trading strategy or to invest into regulated or unregulated funds. The value of an investment can fall as well as rise and is not guaranteed, your capital may be at risk and you may not receive back your original investment in full.
Credo Capital Limited is a company registered in England and Wales, Company No: 03681529, whose registered office is 8-12 York Gate, 100 Marylebone Road, London, NW1 5DX. Authorised and regulated by the Financial Conduct Authority (FRN:192204). © 2024. Credo Capital Limited. All rights reserved.
