Why protection underpins financial planning

Financial planning is a little different to financial advice. It’s difficult to make a clear definition as our profession continues to advance, but advisers and planners are both qualified, regulated professionals giving financial advice.

They both help fulfil an objective, but there lies the main distinction; an adviser will typically fulfil a single objective. A transaction. It could be a pension transfer or ISA top-up. Advice in isolation.

Financial planners focus on a client’s lifetime objectives. It’s a holistic, integrated approach, addressing short and long-term aspirations. The focus is on a client’s lifestyle, financial security, and wellbeing rather than a product.

Underpinning the philosophy of financial planning includes;

  • A holistic ethos of the individual and business
  • The use of cashflow planning, in appropriate circumstances
  • Addressing the long-term needs of the client

But protection, which can be an overlooked area of financial planning, plays a significant role in underpinning a long-term strategy. There are three broad types of cover available;

  • Life Insurance which pays a lump sum on death
  • Critical Illness Cover which can pay either a lump sum or income on diagnosis
  • Income Protection which replaces a portion of earned income if unable to work

Justification for a recommendation naturally depends on client’s individual circumstances, but there are a number of scenarios where a protection policy can be invaluable. For example:

Unforeseen circumstances

Cashflow planning can identify the potential repercussions of an event, such as losing an income source, becoming seriously ill or dying unexpectedly. In lieu of a hypothetically hefty emergency fund, a protection policy offers an elegant solution. Income Protection could replace the income of a family member no longer able to work, for example.

Research from Royal London found that a million people are off sick from work for more than a month every year. Significantly, 52% of people would worry about their income if they were to become too ill to work for longer than a month. Protection, quite simply, can address this concern.

As part of a client’s wider financial plan, the level and scope of cover required could be precisely determined, ensuring the best value in terms of premiums paid.

Making up a shortfall

A Final Salary pension provides a surviving widow or widower with a guaranteed income for life when the member dies. Bu, this is often only equivalent to half the income the deceased would have received, and is likely to be lower if they pass away before their retirement.

This reduction in household income may not provide a sustainable income for the family. A protection policy can be utilised to make up the shortfall, either as a lump sum or regular income.

Inheritance Tax Planning

Whilst there are opportunities within the current Inheritance Tax (IHT) rules to minimise or mitigate a tax liability completely, there may be circumstances where it’s not possible, appropriate, or cost effective. Insuring against a likely IHT liability enables clients to pass on all their accumulated wealth to loved ones.

It is important to write the policy in trust, to be paid to a named individual, otherwise the pay-out upon death would actually be added to the deceased estate, increasing the IHT liability.

Underpinning planning

Whilst protection may not be a foundation of financial planning, it certainly underpins the work we do; offering reassurance in unforeseen circumstances and mitigating tax liabilities. If you or any of your clients would like to discuss your financial plan, review your protection requirements or mitigate IHT, please don’t hesitate to get in touch.

Have a very Merry Christmas, and we’ll see you in the New Year!

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