FOOL'S EYE VIEW
Protect Your Wealth!

By Cliff D'Arcy
April 28, 2005

The road to wealth is a long and twisting one, and it comes with no guarantees!

In fact, there are loads of pitfalls waiting can set you back. As well as contending with big events such as the occasional stock-market slide, events closer to home can leave you reeling. Indeed, it's these personalised mishaps that usually cause the biggest disruption, because they centre on you.

In my long career in financial services, I've seen thousands of people come a cropper – and all but a few of these people claimed that, "It couldn't happen to me". But it does – setbacks happen to thousands of people every single day of the year. Think about the risks you face in your everyday life and you have a list of problems that could hurt your wealth. For example, your financial security can be permanently damaged if you lose your job, fall ill for a long period, have an accident or die.

That's why I disagree when people say that insurance premiums are "dead money". They're not – choose your insurance policies wisely and you effectively transfer the financial implications of potentially disastrous personal risks to an organisation which can easily absorb them. In other words, I'm urging you to protect the people and the things that you value most. Here are some products to help you to do exactly that:

Life insurance (and four mistakes that we make when buying it)

What's the most valuable thing you possess? Your home, perhaps, or your pension fund? Your portfolio of shares, or maybe a luxury car? Nope, I'm willing to bet that none of these are, in fact, your most prized possession. Without a doubt, your most precious asset is you or, to be more precise, your earning power.

And if you die, your "human capital" dies with you. Hence, if you have a spouse, partner or dependants, your death can ruin their future. Hence, you need some life cover, but not any old life cover! The first mistake that people make is not to shop around. Millions of people buy life insurance from the most expensive source: high-street banks and building societies. However, shopping around for Best Buy providers can save you thousands – even tens of thousands – of pounds. Here's an example of the savings to be made.

The second mistake is insuring the family's breadwinner and forgetting to insure a non-working partner, such as a housewife or house husband. This single mistake can destroy young families, as it costs a fortune - £20,000 a year or more – to buy in the invaluable services that a family carer provides. So, insure both parents, please!

The third mistake is to buy joint life, first death cover. This covers two people (usually you and your significant other), but only pays out once. It makes far more sense to buy two separate individual policies, with two potential payouts, as usually it only costs a few pounds a month more.

The fourth mistake we make is to buy policies that deliver Lottery-sized payouts, leaving our families with difficult decisions on how best to use this money. As our goal is to replace income, why don't we buy policies that pay out a tax-free monthly income, instead of a single lump sum? The premiums for this income-based cover – known as Family Income Benefit, or FIB – can be half those for traditional term insurance, as this article demonstrates.

Get a quote in the Fool's Insurance centre.

Protecting your income

After death, I reckon that the next biggest risk to your financial future is long-term illness. If you are severely incapacitated due to an illness or accident, your income will eventually dry up, no matter how generous your employer is. That's why income protection (IP) – long-term sickness cover – should be next on your list. If your employer doesn't provide you with this protection to safeguard your income, then you should shop around for it yourself.

The premiums that you pay will largely depend on these factors: your age, occupation, current health and medical history, the level of monthly benefit required (up to two-thirds of your pre-tax income), the length of your policy, and the waiting period – how long you have to wait before you start receiving payouts. Waiting periods range from four weeks to two years, so if your employer will give you sick pay for up to six months, you can cut the cost of your policy by choosing a 26-week waiting period.

Obviously, some people are considered more "risky" than others. For example, a 45-year-old scaffolder would find it almost impossible to buy IP at any price, whereas a 30-year-old office worker would pay modest premiums for his cover.

Learn more about income protection – and apply online - here.

Critical illness cover

People tend to fear some illnesses more than others. For example, cancers, strokes and heart attacks are high on many people's list of most-feared illnesses. And, of course, the insurance industry came up with a product to cover people who are struck down by one of these conditions, plus a handful of others. It's called critical illness insurance, or CI for short, and most policies will also pay out if you suffer major organ failure, have an organ transplant or suffer permanent paralysis.

CI sure has been popular during the housing boom of recent years, with over a million policies being sold in 2003 alone. Most of these were sold by mortgage lenders to borrowers, with the CI payout being earmarked to pay off the home loan when the chips are down.

However, once again, the high street is the most expensive place to buy this insurance. Hence, the majority of policyholders may have bought a policy that is either wildly over-priced or provides inadequate coverage. Nevertheless, be careful when shopping around for critical illness cover, because terms and conditions vary widely, which means that it's very difficult to compare like with like. If you find a cheaper policy, make sure that it offers equal or superior coverage before switching.

Learn more about critical illness cover – and apply online - here.

More: Visit our Insurance centre | Ten Ways To Boost Your Family Finances!