Avoiding Financial Disaster

Insurance is expensive - a large portion of your premium goes to meet costs - but you need protection against financial losses you cannot afford.

In this chapter, six things that really matter: ~ Protecting your dependants if you die ~ Facing up to possible incapacity, preparing for possible redundancy, insuring your home and contents Car insurance.

Risk management is taking action to prevent possible loss - fitting a burglar alarm is an example. Insurance is the last resort, because of the expense - up to a third of the premium goes to pay the insurer's costs, such as administration and claim handling.

In addition to avoiding financial disaster there are two other areas where insurance may be necessary: for legal or contractual requirements. Car third-party insurance is required by law. A mortgage lender of over 75-80% of the property value may require mortgage protection insurance.

Is this you?

• How can I make sure my family are provided for should I die? • I don't know what would happen if I had an accident preventing me from working. • I think I am going to be made redundant. • Does it matter if my house is under-insured? • I have indemnity cover on my house contents -what does it mean? • I damaged my car by backing into a wall - if I claim will I lose my no-claims bonus?

Protecting your dependants if you die

If you are a member of your employer's pension scheme it may well include a benefit if you die whilst still in service. If not, or if it is inadequate, consider some form of life assurance.

Term

This is the cheapest form as it is for a limited period only. An example is a mortgage protection policy, which is for the life of the mortgage only. If it is a repayment mortgage it only need be on a reducing balance basis -as the mortgage is repaid - the cheapest form of all.

A more specialised example is a family income policy which, instead of a lump sum, pays a tax-free income to your dependants for the period covered.

Whole-life

This pays out when you die and so is more expensive. Premiums can stop at retirement. There will always be a cash-in value and the policy can be used as security against a loan.

Endowment

This usually arises in connection with mortgage repayment and it includes life cover. It is no longer thought to be a good way of saving to pay off a mortgage because of high charges and the risk that there will be a shortfall.

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