Financial Protection for Growing Families: What You Need to Know

Providing for a growing family can be a challenge. From baby essentials, to driving lessons, university, first homes and weddings, there is an ever-growing list of financial responsibilities.

But part of providing for a family means thinking about how you can meet these responsibilities even in a worst case scenario. Fortunately, there are a number of steps you can take to protect your family’s finances. 

Start With an Emergency Fund

An emergency fund is the first step towards financial security. 

This means that if you have any unexpected bills, you will be well-prepared and don’t need to rely on credit cards.

An emergency fund is especially important for a family, as unforeseen events tend to form part of daily life. From a broken boiler or car breakdown, to redundancy or period of illness, your emergency fund can see you through multiple financial catastrophes. 

You should aim to build up an easily accessible reserve of at least 6 months’ essential expenditure. If you don’t already have an emergency fund, it’s worth setting aside as much as you can every month.

Mortgage Protection

It’s likely that your mortgage will be the biggest financial liability you have in your lifetime. Most mortgage providers insist that you hold life insurance to make sure that the mortgage will be repaid if you die. 

Your lender may offer mortgage protection, but it’s worth shopping around as you might be able to find a better deal elsewhere. 

Most mortgage protection policies reduce over time, as you will gradually repay your mortgage. However, there are a few points to be aware of:

  • Reducing cover is no use if you have an interest only mortgage, as the balance will not reduce unless you make overpayments.
  • You will need to review your cover if you increase your mortgage. Remember, if you take out additional cover when you are older, the premiums will probably be more expensive.
  • Your mortgage protection plan will reduce at a set rate, but it is not necessarily linked to your mortgage. If interest rates rise rapidly, you may find that your cover reduces more quickly than your mortgage. 

Life Insurance

While most families take out mortgage protection, many will stop there. But it’s worth taking a moment to think about what else you need to do to ensure your family’s financial security.

If the main breadwinner dies, this could leave the family in a financially vulnerable position. While the mortgage may be repaid, other essential costs could become unaffordable. And that’s before considering future goals such as education, supporting children onto the property ladder, and your own retirement. 

Also, never underestimate the worth of a full-time parent or primary carer. Childcare alone is a major consideration, along with maintaining the home and general life admin. Should anything happen to the main carer, the other partner will need to think about the cost of outsourcing these tasks.

The amount of life cover you need will depend on your earnings, financial situation, and the goals you have for the future. A cashflow plan can help you to decide on the amount you need. It’s worth taking out as much insurance as you can when you are young and healthy, as premiums will only increase later on. 

Many policies will allow you to increase your cover without medical underwriting if you experience any major life changes, such as marriage, children, or a promotion. 

Critical Illness

What would happen to your family if you were in a life-changing accident, or were diagnosed with a serious illness?

A key challenge within protection planning is that no one knows the answer to this. An accident or health condition could have lifelong implications, or it could mean a few months of recovery time before returning to normal. 

A critical illness policy would pay out a lump sum on diagnosis of a serious injury or illness. Each policy covers a particular list of conditions, and will normally specify a level of severity at which they will pay out. 

Some policies will pay out the full lump sum providing the conditions are met. Others will provide a reduced level of cover for less severe conditions. The latter option is usually cheaper and is more likely to pay out. However, claiming for a series of less serious conditions will deplete your cover, meaning that any future pay-out will be lower if you suffer from a more severe illness later in life. 

Again, the level of cover will depend on your financial position, your goals, and the affordability of the premiums. 

Income Protection

Income protection is a widely neglected aspect of personal insurance. We all know we should have life and critical illness cover, despite the fact that the majority of these policies will never pay out.

But it is far more likely that you will suffer a chronic illness that impacts your ability to work. Migraines, back pain, and mental health problems are part of life for many people. State benefits don’t go very far, particularly if you have a family to support. 

An income protection policy would pay out a monthly income to replace lost earnings. The benefits are free of tax and would continue either until you recover, or until the end of the policy term. The amount you receive is capped at a percentage of earnings, and may be reduced if you receive other income (including State benefits).

Income protection plans offer a number of different options:

  • The benefit will start after a deferral period, which may range from one month to two years. The longer the deferral period, the cheaper the cover.
  • The pay-out period could be for a fixed term, or until retirement age. 
  • The benefit could increase with inflation or remain level. 

As income protection is limited by your earnings, it’s worth taking out the maximum amount available. 

Check Your Employment Contract

Some employers provide their staff with death in service benefits, critical illness cover, or income protection.

If this is not available, you might want to raise the subject with your employer. Providing these benefits can be cost-effective and tax-efficient when set up as part of a group scheme. 

Of course, even if your employer does provide cover, the amount is likely to be limited, and will no longer be available if you change jobs. You can always arrange top-up cover independently of your employer to provide maximum peace of mind.

As your family grows and your lifestyle changes, your protection needs will evolve. It’s important to review your position regularly to ensure you are never short of cover. 

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Richard Martin-Redman

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