Embarrassing Financial Questions - 3 of 4
Have you had questions about your finances that you’ve been too embarrassed to ask a professional? In this four-part series, I’m taking a look at 50 of the most popular questions that people may be too scared or embarrassed to ask. Here we go with the next lot of questions.
26 - When do I get my state pension?
This depends on when you were born. If you were born after 6th April 1978 it is currently 68. If you were born between 6th April 1970 and 5th April 1978 it will be between 67-68. If you were born before this the age is 66.
You can check out your state pension age here.
27 - How much will the State Pension be?
The full new State Pension is £179.60 per week which works out to be £9,339 per year. The State Pension is index linked so you can expect it to be worth the same in real terms when you get it.
The actual amount you get depends on your National Insurance contributions. Some people may be eligible for additional state pension.
28 - What does Index Linked mean?
This means that the value increases in line with inflation - the amount it will increase will depend on the measure used. So it could increase, for example, by RPI or CPI.
29 - What is auto-enrolment?
Auto-enrolment was introduced by the government to ensure every employee that was eligible was opted in to a pension automatically. Along with your contribution, your employer also has to contribute to the pension. You are allowed to opt-out of auto-enrolment although you can not be asked to do so by your employer. The aim is to increase the amount people are saving ready for retirement.
30 - What is an emergency fund?
There are various different names but it is a pot of money held in cash to deal with short-term emergencies. For most people, an emergency fund of between 3-6 months of expenses is good practice.
31 - What is a Life Insurance Plan?
This is a policy that will pay out if you die within the term of the policy and can provide a capital sum for people left behind.
32 - What is a Critical Illness Policy?
This is a policy that will pay out if you suffer a critical illness that matches the policy definitions within the terms of the policy. The main claims for this type of policy are for cancer, heart attacks, multiple sclerosis and strokes. Sadly, the fifth most claimed is for children’s critical illnesses. The policy can provide a lump sum to help cover the financial impact of suffering from a critical illness.
33 - What is an Income Protection Policy?
A policy that will provide a replacement income if you are unable to work due to an accident or sickness. This payout will run until the end of the policy term or stop if you are able to return to work. The policy can pay out more than once unlike a critical illness policy.
34 - Can I have both a Critical Illness Policy and an Income Protection Policy?
Yes, you can have both. This is actually good practice as they each cover different risks. It is possible to claim on both a Critical Illness Policy and an Income Protection policy, provided you meet the required definitions.
35 - Am I only allowed insurance to cover my mortgage amount?
Most people take out life insurance and/or critical illness policies to cover their mortgage. However, you are allowed to have additional cover which could be used to replace lost income or cover other expenses. The level of cover you need will depend on your circumstances.
36 - What is a Death in Service benefit?
This is an employee benefit that companies often provide. It will pay out a lump sum should you pass away whilst working for them. Typically, it is a multiplier of your salary such as four times the amount you would receive in a year. For example, if you earn £100,000 a year and had a 4x Death in Service benefit, your beneficiaries would receive £400,000.
37 - Do I need personal insurance if I have Death in Service benefits?
It depends on the level of cover your circumstances require. In the example above it may sound like a lot of cover but if the family outgoings were £60,000 it may only last just over six years. If you have younger children this may not ensure your family is fully protected or be able to help pay for future costs such as school fees and university.
38 - I have sick pay through work. Do I need Income Protection?
Again, this depends on your circumstances and the amount of sick pay you receive. Most employers will offer some sort of sick pay such as full salary for three to six months, then pay half that amount for a similar time period. If you were still unable to work after your company's sick pay ended then you would benefit from an Income Protection plan. The Income Protection can be set up in line with any sick pay you receive.
39 - What is Level Term Insurance?
This means your life or critical illness policy will stay at the same value for the entire term of the policy. For example, if your cover was £500,000 over a 20 year term, no matter whether you claimed in the first year or the nineteenth year, you would still receive £500,000.
The insurance can be index linked as the spending power of the £500,000 would erode over time without it.
40 - What is Decreasing Term Assurance?
This is where the level of cover decreases over the time of the policy. For example, with mortgage protection, it would decrease in line with the mortgage. Over a 20 year term, you would receive a smaller amount in each subsequent year of the policy.
Bonus question - do I have to use the policy to pay off the mortgage?
Although the policy may be set up to cover your mortgage it doesn’t have to be used solely for this purpose. In most cases, it would be, but it’s not a finite rule. Equally, if you don’t have a mortgage you can still claim on your policy in line with the policy terms.
Look out for part 4 tomorrow!
This article doesn't constitute financial advice and is intended as information only. Should you need financial advice you should speak to a trusted financial adviser. For simplicity and brevity purposes, I have been unable to cover off all of the different elements that I could answer. This is intended to be as simple as possible and not an all-encompassing answer.
You should do your own research before acting on any information within this blog.