16 May 2019
Keith Brooks, Chartered Financial Planner at Aberdein Considine, highlights the importance of financial protection.
Other than planning for retirement, buying a home is probably the biggest financial commitment any of us will make. It is also, arguably, the largest single purchase most of us will make in one go.
It’s slightly ironic then that many people take a far shorter time to choose their next home than they do for much lower value items. But choosing your dream home, and securing a mortgage are just the initial parts of the process.
And for those doing so for the first time, it can be a complex and stressful activity, with a range of things to consider before, during and after taking the plunge.
And indeed, as we get older, and reach different stages of our lives, whether that’s getting married, having children or looking after older loved ones, the pressures and financial commitments increase.
As we move through our 20s, 30s and 40s, hopefully we are earning more and gaining more assets and wealth. And as we do so, there is an increasing need to protect what we have in case life doesn’t quite work out the way we hope.
Protecting income and wealth is something most of us have to consider if we want to maintain our lifestyles in times of financial difficulty. And for those with a family, protecting them is equally if not more important.
Protection comes in all forms, from life assurance and critical illness to income protection, and there are options on the market which cover almost every eventuality. But when we think of protection and insurance, the spectre of the PPI or Payment Protection scandal casts a long shadow, and there is no doubt this has made people wary of using these types of services.
The crux of the PPI story surrounded the mis-selling of policies to those who either didn’t agree to it or who didn’t need it - sold by those who, in many cases, did not understand what they were selling.
The media coverage and the multitude of claims companies which have sprung up has created a fairly dangerous situation where consumers are, understandably, suspicious of such products.
But despite the horror stories we have heard over the last few years, there is no question that protection services and products can be a crucial part of financial planning. For those with mortgage and family commitments who lose their job or regular source of income, it can be devastating. And it must be said that the welfare safety net is flimsy at best.
The industry has certainly moved on. It has been reformed, and is highly regulated. No one who owns or rents their home would choose not to have home insurance. If it makes sense that you protect your home and its contents, why wouldn’t you protect yourself and your family?
Life is complicated, and we have no way of knowing what it has in store for us. Insurance and protection exist for a very good reason. But they are also unfashionable for both the reasons mentioned already but also the fact that they are not there to suddenly increase or grow your wealth but to simply maintain what you have in times of hardship, and provide some security.
Turning back to the subject of obtaining a mortgage, the amount you pay every month will likely be your biggest outgoing. But your biggest outgoing keeps a roof over your head. And if, for whatever reason you no longer had a regular income, what then?
There is a cost to this protection, no one should try to pretend otherwise. And when buying a new home, that cost is one of only a number of considerations when finances may be stretched.
But every individuals’ circumstances are different, and not everyone will need every type of insurance or protection.
Peace of mind is a vital commodity, and we all want to protect ourselves and our families against the challenges which life throws at us.
It may seem odd in terms of financial planning to pay for something you hope you won’t ever require, but maybe it’s better to have it and not need it, than to need it and not have it.