147- A Different Way To Protect Your Family

So many of us have heard of life insurance as a way to protect our family and our financial plans, but too few of us have heard of another product that, instead of providing a lump sum, can provide us with a regular monthly income in the event that we're no longer here. 

The benefits of these plans can provide you, and your loved ones, with significant  peace of mind, often at minimal ongoing cost. 

Knowledge is power, money, nerds. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

Getting on top of your personal finances doesn't need to be complicated or scary. Arm yourself with the only knowledge you need to transform yourself from money novice to money nerd! 

Take my 5 minute retirement assessment (can you already afford to retire?) 🚀


Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:09

Hello money nerds, welcome to Heads Up on Money, Personal Finance Friday rolled around oh so quickly. And in this week's episode, I'm talking about some of the fundamentals you need to have in place with your financial plan. And specifically, we're talking about how you can ensure your family is taken care of if the worst should happen. So the reason I've recorded this episode now is I had a discussion on this planning with some clients recently, and it kind of made me realize that many people aren't really aware of this type of planning and how it can actually be hugely, hugely beneficial for certain types of clients and offer the peace of mind that you're after often at a lower cost. So it's a really good thing to consider. So I'm going to get into it in this episode, again, trying to keep it brief where possible. So, welcome back to Heads Up on Money. And if you're listening to this, there's a good chance that you've maybe started thinking about your financial planning in a more serious way. You've perhaps started investing, you've maybe allocated more of your surplus income towards long-term asset classes. You're doing a lot of the good stuff, but as I've talked about in other episodes of the podcast, too many people jump in at the deep end. They focus on the more exciting, sexier stuff like investing and tax planning when they do not have the financial foundations in place. They're building their financial plan on a two-legged stool. So the rhetoric I always give to listeners of the podcast and indeed clients is the acronym BED. You pay off any bad debts you have, you have a suitable emergency fund in place, and you have a disaster plan in place. And focusing in this episode more on that last element, the disaster plan. So that's really what today's episode is all it's about. It's about saying if you had one of the moments where you think to yourself, you know, if something happened to me, what would actually happen to the loved ones in my life and the people who rely on my income? So most people were familiar with life insurance. The concept being that if we die, a lump sum is paid out to our loved ones on our death, and our loved ones can use that money as they see fit, perhaps, to clear the mortgage. That's the most typical way. And we can take out life insurance privately, or often our employers will have some form of life insurance. It might be called death in service, salary multiples, whatever it might be. But essentially what's happening here is you're getting a chunk of money or your loved ones are in the event that you pass away. But people rarely think about structuring their protection affairs in a way that's less a one-off payment and more about replacing the income that a family would have been dependent upon month to month. And that difference really matters in real life because households don't run on lump sums, we live on monthly incomes. So I'm going to bring this to life in this episode by talking about what exactly is this type of income replacement strategy, who does it make sense for, how does it compare to more traditional flavours of life insurance, and how this might fit into a conversation you may have with your loved ones, or potentially something to raise with your financial planner at your next annual planning meeting with them. And again, I will try and keep this short and sweet, as exciting as I can make this stuff and free from jargon as always. So let's start with something very basic is most of us don't think about large sums of money day to day. We think, as I've said, in months. We pay our rent, we pay our mortgage, we have utility bills, we have the nice to have, the things we enjoy spending our money on. We've got food shops, we may have childcare, travel, school costs. The list goes on and on, and the cost of living goes on and on and up and up. So when people think about this stuff, when they think about financial protection, the real question is not just how much money would my family get. It should more be how is that money structured? Would they actually be able to keep life going month to month if my income wasn't there anymore? Particularly if you are the main breadwinner in the family. In reality, the sad reality to all of this is if someone dies, the financial pressure doesn't necessarily arrive as one big event, it arrives as a series of everyday costs that need to be paid for. It's multiple events that amplify over time. So a lump sum can absolutely help. I'm not disparaging life cover, life protection. The caveat I'll say to this is too many people believe they have the good protection plans in place because they've got life cover, whereas in reality, life and critical illness cover can be far more beneficial because sadly you're far more likely to suffer an illness, a stroke, than you are to pass away. So having life cover in isolation is often a misnomer and a false sense of security. Again, getting sidetracked here. When we're looking at life cover and lump sums, yeah, it can help, but there are better ways you can do this, or additional ways you can do this to provide more holistic cover and better peace of mind. So a different way to think about this money nerds is replacing an income instead of playing a lump sum. So instead of thinking about what happens if you're no longer here, the payout being one big payment, there's another approach that focuses on something much more familiar to all of us, which is a monthly income. And rather than paying everything at once, the idea here is that this payment is drip-fed over the time period with which you take out the plan for. So instead of receiving a lump sum, a family might receive a fixed monthly payment for several years. When you have one of these plans in place, it can meet the day-to-day costs so that the lump sum that is paid out in any life cover you have can then be used perhaps for longer-term planning. It can be invested, it can be parked in pensions and ISAS and done all the great stuff with long-term planning. If you use that lump sum right away to cover day-to-days, then the longer-term plan could be jeopardized. So this is where this type of product comes into place, and it's less about managing capital, it's more about managing ongoing income stability. So the product itself is called family income benefit. It's called FIB, and so few people are aware of this, but it is extremely valuable for the right person. Historically, I've been recommending these to clients who may have young children or people who are dependent on their income. And a good way to structure these is typically you would run them until the date at which your young child is no longer financially dependent on you. So in the event that you're no longer here, your surviving loved one will get a regular monthly income to cover the costs of childcare, or to even if they don't have a child to cover the costs of the mortgage or whatever it might be, whatever your financial plan might be, the benefit, of course, is you have a regular income coming in rather than that lump sum of capital. And tons of people have got the lump sum and capital covered to an extent, even through their workplace, if they don't source it privately, but so few people have thought about the issues in their financial plan if they're not structuring income on an ongoing basis. So few common scenarios of when these types of products can be beneficial is if one income holds most of the household together. So if a household's main relying on one person's income, then the impact of losing that income, of course, could be catastrophic. It could be the difference between achieving retirement goals and not achieving retirement goals. Typically, as I've alluded to, families with young children can be hugely beneficial where there's children involved because the financial picture tends to continue even in the event that something unforeseen was to happen to one of you. There are still bills to meet, there are still childcare costs, sometimes these go up when a loved one is gone. So having these products in place can be a way of having almost that monthly salary continuing to come in even when you're no longer here. And of course, they can be great with long-term commitments such as mortgages or rent. So, how do these products compare to a lump sum? Well, lump sum approach, one payment is made when you claim. There's maximum flexibility, of course, in how the money is used. You can clear your debts, you can pay off a mortgage, or it can be invested, but it does require some ongoing thoughts and decisions about how best to manage that. It can be spent straight away if you've not used it wisely or if you've not invested it wisely. Whereas an income-based approach is very much drip feeding that benefit over time, regular payments over a defined period designed very much to mirror the income that you, your household, your loved ones, your children have become accustomed to. It's simpler to budget for, it's less flexible, of course, but there's more structure and predictability to the payment patterns. And a benefit that many people fail to appreciate is it's often cheaper than life cover. And without getting into the details here, folks, if we imagine you currently have a you have a five-year-old son, and they are no longer going to be financially dependent upon you when they are, let's say, 25. At that point, you would envisage they would have completed further studies, apprenticeships, they'd have got onto the property ladder. So you've got this 20-year time frame whereby there's a risk in your financial plan if you're no longer here. Now you could take out life cover, and I would encourage that's a relevant thing to be considering. These products are not mutually exclusive. The best financial plans uses all of them. You take out life cover, and let's say you run that life cover cover over a 20-year period. Let's say life cover of £500,000. Now that's going to be relatively expensive compared to the family income benefit policy. And the reason for that is if you were to pass away at any point within that 20-year term, the insurance provider has to pay that £500,000. So if you lived for another 15 years and you passed away five years before the policy is due to end, you would effectively still get your half a million pounds in the insurance policy payout. So the insurer is still on the hook for that full sum assured for the duration of the term. Where a family income benefit policy can be more cost effective is because there's less risk from the insurer. If we flip this on his head and say, in addition to you taking out a life cover of half a million pounds, you seek to replicate the 50 grand salary that your family has become accustomed to. So in the event that you're no longer here, you want your family to receive that income until let's say 20 years from now, until the date that your child is financially independent. So you run a family income benefit policy which pays out 50 grand a year, 4,200-ish, if my math is correct, pounds per month. And of course, the earlier you die, the greater payout the insurance provider will have to make. But as you get older and closer to the end of that term, there's less payment window with which the insurer will have to pay that regular income for. So if you were to die in 15 years' time, there would only be five years worth of payments that the insurer would continue to have to pay, which is a lot less than the half a million pounds that they had to pay under the life insurance plan. So what this matters and where I'm going with all this is not to say that a family income benefit plan is crap and that you're not going to get as much in the way of cover if you live longer. Although that's true, the benefit to this from your perspective is these plans are often really financially efficient. They don't cost the earth and they're far cheaper than a life insurance plan, but can offer bags of peace of mind on the side. I would almost always recommend these for people who have young family. Not having them in place is just not worth the risk, especially when the costs are not all that prohibitive. They can be really encouraging the costs on these types of plans. And again, it's because statistically you're unlikely to die, but in the event that something does happen, in the event that sadly you are the statistic, the impact on your financial plan can be catastrophic. So bringing this scenario to life, this individual would have a life insurance payout that would pay out half a million pounds, and they would also have a guaranteed income paid to their loved ones to meet the ongoing costs of childcare until the child was adult age. And the loved one would have security, knowing that the monthly outgoings are covered, that the life expenditure is covered, that real life is covered. But in addition, there's a life insurance payout there that can be used to perhaps clear the mortgage or perhaps do something more longer-term planning with such as investing in their child's future, investing in their retirement plan, investing in your own retirement plan. You've got much more flexibility, it's much more all-encompassing cover for very little ongoing cost. So again, money nerds, the reason I'm talking about this in Heads Up on Money this week is not to sell family income protection plans because there's a role for them. Sometimes they'll be suitable, sometimes they won't, but it's to educate you, money nerds, to understand that these types of plans are out there. It's not as black and white with life cover as you may think. Again, most people are not aware of this, but the benefits can be huge. And I just, if anything, in this week's episode, really just want to articulate the benefits of these plans and to make you aware of them. Whether or not this is relevant for your own financial plan or not will of course be unique to you, but there'll be somebody in your life that these plans may be relevant to, someone in your life that should be aware they exist. There's lots of information on the internet to read up on this, but this is very much the foundations, so share this episode of the podcast with them. The more people that are aware of this, the better disaster plans in place we have with our financial plan, which means you can then focus on the more exciting stuff. So I really want to wrap this up, money nerds, because it's been a bit technical there, but hopefully you found it beneficial and of interest. If you have, do all the great stuff, like, subscribe, reach out to me, let me know your thoughts. My contact details are in the show notes. There's lots of ways you can reach out to me. You can book in a chat with me, or you can just ping me an email, give me some feedback on the episode. And if there's anything you want to cover in the future, let me know. You are in charge with this podcast, Money Nerds. Most of the episodes I do stem from real questions that either clients or listeners of the podcast have asked me. Because if it matters to you, it probably matters to other people, and if you're confused about it, as often is the case with finances and money management, is it's not a ridiculous question. Tons of people are in the same boat as you. You are not an idiot, there's no such thing as a silly question when it comes to your money. So that's what Heads Up on Money is here to do, to try and debunk and de stress all of this stuff that surrounds us with money. So I'll see you next Friday. Thanks as always for your attention. It means so much to me, genuinely. So thank you. And I will see you next Friday for another episode. Until then, stay safe out there. Have a great weekend, and I hope the sun shines wherever you are. Take care.