Family financial security: the steps you need to take
It goes without saying that families are important. Ensuring that our families are financially secure in the future should be a high priority for every parent.
It would seem that making sure financial security exists before we start a family is a must for a large number of people.
New research carried out for National Savings & Investments by the Future Foundation found that nearly two-thirds (64%) of people believe you should be financially secure before starting a family.
Our finances also influence important decisions about the planned size of our families. The research also found that 78% agreed standard of living was an influencing factor when deciding how many children to have.
When we have brought children into the world, it appears that our priorities change a little. Despite a steady increase in the sales of life assurance in recent years, the gap between the life cover we have and what we should have remains at over £2 trillion in the UK. That’s a pretty big gap!
Life assurance is not the only thing to think about when ensuring future financial security for your family. Here are the steps you might need to take to make sure that your family is financially secure in the future.
1 – Get protected
Often the place to start is putting in place sufficient life assurance cover. You should aim to do two things with this life assurance.
Firstly, to pay off all of your debts, including your mortgage and any credit cards. In the event of your untimely death, you would not want to put your family in the difficult position of having to sell the family home to repay the outstanding mortgage.
Secondly, you should provide enough capital or income to fund their lifestyle in the future. This is typically done with Family Income Benefit which pays the sum assured in the form of an annual benefit. It should be easier for your family to work with a regular income after your death than having to invest and manage a capital lump sum.
The first figure should be simple to calculate. You need to get a current balance from your mortgage provider and a figure for any other outstanding debts (credit cards, personal loans, store cards, car finance, etc). The second figure, working out how much your family would need longer term, is more challenging to calculate.
To arrive at a reasonable figure, you need to look at your current expenditure and think about what would change in the event of your death. Work through each item in your budget and agree with your partner how this expenditure might increase, decrease or be removed. Don’t forget to factor in future price inflation.
Remember that you might already have some financial resources in place in the event of your death. In particular, look for any death in service benefit from your employment, the life assurance element of any endowment policies and the value of your pension funds. In the case of pension funds, make sure you have nominated beneficiaries so the trustees know where you would like the value of your pension fund to go in the event of your death before retirement.
2 – Write a will
If you have children then you should have a will and this should reflect your current wishes. Within this you will want to do two things; provide instructions for who should receive your assets in the event of your death and appoint a guardian for your children.
If you die intestate (without a will) then the distribution of your assets will depend on your personal circumstances, but will be dictated by rules introduced in England and Wales in 1925. Instead of your money going to chosen beneficiaries it is instead paid to other relatives. If no such relatives exist, then the value of your estate is paid to the Crown.
Making a will is particularly important for unmarried couples who cohabit and/or have children together. It is also important if you have children from a previous relationship.
Getting your wishes formalised within a will is a sensible financial planning step to make sure that your money goes to the right people, with the minimum of fuss, in the event of your death.
3 – Stay organised
Financial aspects are only one immediate worry in the event of an unexpected death. The ability to quickly and easily place your hands on relevant financial documents is essential.
Whilst you might know precise where to find all of your important financial documents, there is a reasonable chance that your family will not.
Rather than putting them through the added stress of locating your paperwork, consider creating a ‘death folder’ which contains a summary of your assets, liabilities, accounts and financial policies, along with a copy of your will and other instructions. You might also want to include personal letters to your loved ones, for opening in the event of your death.
Staying organised involves more than just the financial and legal aspects of your life. Also think about your personal property. Keeping your life in general organised will make things much easier for your family to deal with in the event of an untimely death.
4 – It’s not just death
Whilst we often think about life assurance and wills in respect of family financial security, it is also important to consider the financial impact of other events. These might include the diagnosis of a critical illness, becoming disabled or suffering from a long-term sickness. All of these events can have a detrimental impact on your financial capability, potentially resulting in financial trouble for your family.
It is possible to put in place financial protection for all of these events. Critical illness cover, permanent and total disability cover, and income replacement insurance are all readily available types of financial protection. Your ability and willingness to put these things in place will depend, to a large extent, on affordability.
Whilst in an ideal world you would want to insure against every possibility, in practical terms you will need to prioritise and then align protection with your budget. The first step is to consider the various risks and find out how much it would cost to insure against each one occurring.
5- Keep things under review
Planning for the future financial security of your family is not a ‘one off’ event. It is something you need to keep under regular review to take into consideration changing circumstances.
A formal annual review of your plans makes real sense. You should also take a closer look at your arrangements each time you experience a ‘life event’ such as a change of job or the arrival of a new child.
Martin Bamford is site editor at BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford.
