Protecting your wealth?

March 9th, 2011

You’ve started on the road to creating wealth via saving regularly and/or have lump sums investments.  What comes to mind when you are asked ‘how will you protect your wealth?’

As you would expect the answers will differ based on whom you ask, but common answers may be:

•    Invest in index-linked investment to protect against inflation
•    Invest in equities to provide growth in value and preserve future value
•    Invest in low risk areas to avoid capital loss

Predominantly the answers will concentrate on the protection of the capital value from an investment return perspective or the buying power of the money, but how will you continue paying into your savings or avoid accessing a nest egg should life throw one of any number of unexpected oddities at you?

To preserve or further accumulate wealth, the expectation is that your income exceeds expenditure and therefore you can afford to pay the contributions needed to enhance your wealth.  But what if your household income is less than your outgoings? This means you reduce your other outgoings (if you can), reduce the contributions to your savings, borrow the money, deplete your savings or a combination of these.

To put this a different way could part of your investment strategy be to “insure” your investments?

Below are some considerations for protecting different elements of your ongoing Wealth creation plan:

Regular payouts

Protection can be put in place to protect against some of the common causes of short term reduced income:

Unemployment

As a result of unemployment then there is the immediate loss of income and the minimum expectation of state help until you find a new source of income.  Unemployment cover can provide a replacement income until you either find a new job or until the end of the payout period (usually 12 or 24 months maximum)

Illness/accident/Serious illness

Should you fall ill or suffer an injury and be unable to work then unless you have protection at work (which can be limited) then again there will be a minimum expectation of state help. Some of the types of cover available are:

Income Protection insurance (subject to a deferred period) pays a monthly amount directly to you while you are unable to produce an income due to illness or injury. This can either pay out for a limited period (12/24 months) or until a predetermined age such as your anticipated retirement date.

Some plans such as ASU (Accident Sickness and unemployment) combine both elements but only pay for a limited period (up to 24 months)

Death

The ultimate income reducer, but your saving plans may be insufficient to provide for the family you have left behind to both maintain their lifestyle and/or future plans.

Family Income Benefit is a form of life cover that will pay out a predetermined monthly amount from death until a specific end date of the plan  –  this can replace the income that you would have provided the family with and allow the plans in place to continue

Lump Sum payouts

Critical Illness

Critical illness cover will provide a lump sum cash payment on diagnosis or the suffering of one of the critical illnesses listed as being covered such as a heart attack, stroke etc.  Although the level of payment can vary based on the severity, this can prevent the need to utilise saved capital for home modifications, mortgage repayments or create a breathing space before needing to return to work.

Death

Term assurance is a form of life cover that will pay out a predetermined lump sum on death prior to the end date of the plan, whole of life plans are similar but there is no end date – this lump sum can be utilised to replace the income that you would have provided the family with or pay off debt.

So as you can see protecting your wealth is not simply a case of investment risk, but the risks to your investments themselves.