Three mistakes people make with their financial protection
There are three common mistakes that individuals make with their financial protection.
1. Only having mortgage cover
Most families are aware for the need to protect their mortgage with life cover or critical illness cover that pays out if they are diagnosed with a serious illness but this only covers half the problem. Imagine a typical young family; parents are aged 40 with two young children. The father passes away unexpectedly and the life cover pays off the mortgage. Now what? So the mortgage doesn’t exist any more but where does the money come from to pay the bills, school fees, clothing and other costs of essential daily living. All families, especially those with dependent young children should do a complete review of their protection to understand what the impact of death or serious illness would be on their family. It is only at this stage that a family could claim to be adequately protected.
2. Business Owners not taking advantage of tax breaks
Most business owners and directors of limited companies have some form of life cover which they pay either from the company account (where they are taxed as a benefit in kind) or from their personal bank account (which is net of tax anyway). There is a product that is available to company directors which enables the business to use the premiums as an allowable business expense. This can reduce the actual net cost of the policy by up to 50%.
3. Policies not being written into trust
If I tried to sell you a policy that paid out up to 3 years after you needed the money, the money went to someone who you didn’t want it to go to and the taxman had 40% of it, would you buy it? You probably already have. Industry estimates state that up to 90% of life policies are written this way as they are not written into trust. Writing a policy into trust ensures that the money goes to who you want it to, the proceeds are paid out within 14 days of death and the money is paid outside of your estate which means that the taxman won’t get his hands on it. If you do one thing today, check to see if the policy you have is written into a trust. If it isn’t then do something about it.
If you have concerns about any of the above please contact me and I can put you in touch with a financial adviser who can advise regarding individual circumstances.
Thanks are due to Louis Meryon Dip FA for his contribution to the blog this month.
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