Jargon Busting: An Easy Guide to Protection Planning
Protection planning is all about protecting and preserving your wealth, for the benefit of you and your loved ones.
Many different life events or unfortunate circumstances can have a negative impact on your finances in the absence of any protection. So financial protection is clearly important, and is therefore a vitally-important area that our Independent Financial Advisers (IFAs) advise clients on.
Yet the world of protection and insurance is often quite complicated, particularly for people who maybe haven’t worked with a financial planner before. What kinds of protection and insurance are available, for instance? How do they work, and which ones do I actually need?
In this short guide, we’re going to provide a simple overview of some of the main types of protection available today. Hopefully, this will give you enough information to start thinking about the areas most pertinent to you.
If you’d like to discuss any of the below in more depth with a member of our team, then one of our independent financial advisers would be delighted to speak with you.
We insure many of our possessions, such as our mobile phones and cars. In the event these are damaged, stolen or simply go missing, they need adequate cover.
The same thinking applies for life insurance. If you were to disappear all of a sudden, how would your family cope financially? By taking out a life insurance policy, you can ensure your family are provided for in the awful situation this eventuality was to occur.
Term Life Insurance
A specific type of life insurance policy, term life insurance covers a specific timeframe. If you die within this specified period, then your policy will pay out tax free to your beneficiaries.
Likewise, if you do not die during this period then the policy will not pay out, and you will not get your premium payments back, however, it does mean the premiums are correspondingly low and you will be pleasantly surprised how much cover can be arranged for such a low premium.
This can be a good option if you need specific cover for a limited period of time. For instance, if you do have an interest-only mortgage which is not covered by an endowment policy.
This is basically what it sounds like – the opposite of term life insurance! This type of policy pays out when you die, whenever that might be.
Since these policies are guaranteed to pay out at some point, they are typically more expensive than term life insurance.
Whole-of-life insurance policies have an important impact on your Inheritance Tax (IHT) bill, which is important to consider. For instance, it is possible to set up a policy which covers any inheritance tax that you owe upon your death, meaning more of your estate would be passed on to your beneficiaries. It is also possible to exclude this policy from your estate proceeds as well, through a trust. This also ensures who receives the tax free benefits and can be paid without obtaining probate, meaning it can pay out faster.
Yet all of the above is a very complex area of tax planning, and you should always seek professional financial advice from an experienced independent financial adviser first.
Critical Illness Cover / Income Protection
If you become seriously ill this could seriously undermine your family’s financial security. By taking out critical illness cover, you can help prevent this.
For instance, suppose you work in an industry where you need to possess a lot of physical energy and mobility, yet you contract a serious illness which takes these away from you for a prolonged period.
With an adequate policy in place, you can receive a tax-free lump to keep you and your family going while you recover.
Private Medical Insurance
A private medical insurance policy gives you access to private healthcare, in the event you or your family experience distressing symptoms, injury or illness.
It’s sometimes asked what the benefit of this is, when we have the NHS – medical care which is free at the point of use. The answer is largely: speed. Typically, you get seen much more quickly under private medical care, and the diagnosis is usually much faster too.
The premiums you pay can cover some or all of the medical costs incurred from treatment.
Lasting Power of Attorney
LPA is often the shorthand used here, and it refers to a legal document which lets you assign specific people (your “Attorneys”) to make decisions, on your behalf, while you are still alive.
For instance, you may become unable to make independent decisions later in life about your welfare or finances, perhaps due to illness, injury or old age. In such a situation, your LPA document empowers the attorney to make such decisions on your behalf.
As part of your inheritance tax planning, one option you might want to consider is putting some of your assets into a trust.
This can help you save on IHT, depending on the type of trust in question, the value of the assets you have committed to it, and who the beneficiaries are.
One huge benefit of a trust is that it lets you hold assets for a beneficiary, setting them aside for a specific time or situation. For instance, you might hold the money for a grandchild in a trust until they are older, with the intention that it is specifically used towards a house deposit.
Anything of value which you own is considered part of your “estate”. This includes, for instance, your jewellery, property, investments and cars. If the total value of your estate exceeds £325,000 (this amount can be greater in some circumstances), then you may need to pay 40% inheritance tax on anything above that amount.
An important part of our work as independent financial advisers is helping clients legitimately, and ethically, reduce their IHT liability. This allows you to pass more on to your loved ones, avoiding unnecessary tax.