Pulling the trigger on Insurance

For those of you who have been following my (random?) drivel and thinking around insurance, I can confirm that this month I finally pulled the trigger on my income and life assurance insurances.

I had a number of fairly lengthy discussions with my Financial Adviser on this (at zero cost, this is all covered as part of the regular fee he takes out of my contributions). I’ve run all the numbers multiple times, planned out worst case scenarios etc. to make sure this is the right choice.

So earlier this month I cancelled my two direct debits to the insurance companies. Needless to say they are both trying to get hold of me and get me to restart the payments – something I won’t be entertaining.

How do I feel right now? There are some mixed emotions, I will be honest. It is one thing to see a bunch of numbers on a spreadsheet but a very different thing when emotions start to enter it. Will I be able to sell ISA holdings if push comes to shove? I’ll let you know if I ever get to that point!

For the first time since I have owned a property I know now that if the worst case scenario were to happen, we would have to sell our home and move. Granted this would be after a number of years and we have enough equity to buy a smaller home outright, but still leaves me a little uneasy.

On the plus side, I am REALLY looking forward to being able to put those insurance premiums into my ISA, watching them grow and increase in value knowing that they are making me (and not my insurance company) wealthier. It may be a little sad but I really do get a buzz out of that!

So, what am I doing with April’s premiums? Well, actually because of the timing of my investment to GTP ISA, they will simply go into cash reserves whilst I am still “suffering” from my companies Share Scheme, but after that, they will be invested.

I am still working my way through some of the Investment Trusts that I am likely to decide on one from and will post my thinking and findings once I have decided. I could have added it to VWRL but I want to keep these funds separate for my own sanity – showing just how much I have managed to invest by not paying insurance will be a nice feeling in retirement.

The other benefit that I hadn’t fully appreciated, is the difference it will make to my savings rate. I went through and updated my monthly expense tracking spreadsheet to see where I was going to be. I realised that something is going to have to give in April and May as I will be putting money into ISAs and I will not have enough to live on. I will worry about that problem once I know what my pay cheque in the new tax year will look like.

So part 4 of this random drivel (A New Hope again maybe?! :)) I will delve more into the ITs I will be looking at, in the meantime I need to go and start clearing some snow…

Enjoy the snow, and stay nice and warm!

Evaluating my insurance

So, further to my contemplation moment, I have been digging into my current cover and what this may mean for me. As we approach end of tax year, I can also change my benefits package so I want to be ready – I only have a week or two to make these changes so I want to be ready. Sadly I can’t look at it for now for another 2 weeks whilst they prepare for the 2018 – 2019 year.

Right now with all the opportunities at my current company, I can’t see me moving for a good few years by which time I am confident I will be comfortable enough to cover this with the mortgage coming down. The question I always ask myself is, “Could I see myself retiring from this job”. The answer right now is yes – for the first time ever.

So first up – payment on my demise. My company actually has death in service benefit (I need to check if this pays out while I am on holiday / weekend etc.) which I hope I can take up to to cover the outstanding mortgage. On the assumption I can dial it up enough to cover the outstanding mortgage (which will of course reduce month on month), then this means I can kill off one of the insurances.

Unemployment Income protection. So I do have this outside of my companies benefits, but not with them. If I were to cancel this the only risk is if I lose my job at work. I certainly don’t intend to be fired (in the sense of out of a job), so the risk would be redundancy.

I’ve been given notice / put at risk of redundancy on multiple occasions – not a nice feeling, but I’ve never been made redundant. If I were to be made redundant I would be made some form of offer, and I would be able to find a new job before I run out of cash.

Given this, I am going to be bullish and say I won’t need this, but I do need to build up some cash reserves.

So, this just leaves the income / critical illness insurance. I can elect exactly how much of my salary as a percentage I can take as income, so I can dial this up so that I can not only cover my basic expenses, but also save and invest – or overpay the mortgage for the few years it applies.

I’ve got all the previous years insurance documents that I am still reading through (and will bounce past my IFA – he does need to earn his fees!) but the first conversation was a good open discussion. Given where we are now it looks likely that I will drop the insurance, however I will only know this for certain once I can change my benefits.

Right now I am so certain that I will be able to drop private insurances for now that I will start looking at which Investment Trust to put the premiums in! I won’t be changing anything until the new tax year so I have some time to just be comfortable with my decision.

Will I be able to sleep at night if I cancel the insurance? Yes – provided the numbers add up! Adding the premiums into my ISA for the next 7 years would, at roughly 5% returns, add a good extra bit to my total pot when I retire.

I plan to do the same with the premium investment trust as I do with my cash reserve experiment. I will drip feed each month and reinvest the dividends. Mentally I am also setting myself that I can sell this if the need arises (unlike my main ISA) to cover expenses as it is “free” money that was going into insurance.

I have a strong sense that I am over insured at the minute but until I finish running the numbers I won’t be certain. The only reason I am looking at it now is how much my investments have grown over the last few years – the bull market has been good to me, and rebalancing has taken out a chunk of the volatility.

I am a little apprehensive at the minute, but once I gain access to the new benefits I will be able to run the numbers and be comfortable…. watch this space!

 

Contemplating Insurance

So one of the things that often gets discussed is the level of insurance that you do, or do not, need. This Christmas gave me some time to think about my insurance, and what to do about it (and on the back of a conversation with a work colleague). So a complete essay of mindless drivel follows!

So some of the insurance is a no brainer for me:

  • Car Insurance. Well I can’t really drive without it so no choice there
  • Buildings (& contents) insurance. Well a stipulation of my mortgage is that I have buildings insurance so I can’t not, and I have contents insurance as it would not be cheap to replace everything I have here (and I don’t just mean the food and wine :)) – add in clothes, tv, shoes, food, alcohol, white goods etc.
  • Travel Insurance – as and when needed. In the past I had an annual one, but nowadays as I have cut back on travel I don’t need it as much. That said I would always have some for when I travel, it just isn’t worth the risk not to for me. I have once had the misfortune to need to call on it (that’s a down the pub discussion)

There are also two other insurances that I have at the minute, that I am contemplating if I really do need. Life / Critical Illness insurance, and Income Protection. I am actually over insured on these at the minute as I had an existing policy before I joined my new company. The new company has these, but not to the level I would have liked. And who knows how long I will be at my current company, and if I move, will the new company offer anything similar?

I ended up looking at both if I used my current company one and if not where that would land me.

First up – why do I have these insurances? Simple – as I may have mentioned once or twice before on this blog… we have quite a large mortgage, in fact larger than my other half could cope with if she had to pay the whole lot herself, never mind bills. I want to know that if anything were to happen to me she could remain comfortably in our home without money worries (and she is not yet the best on that side anyway!).

So, Life / Critical Illness insurance. This will pay out a lump sum if I either die or have one of a long list of illnesses, and is sufficient to completely pay off the mortgage.

The Income means if I am out of work for whatever reason (non critical illness) or something else happens, I can continue to pay the mortgage, bills and invest, enjoy life.

I am now in a position where my retirement funds are greater than the outstanding balance of our mortgage, however a large chunk of this is in my pension and so can’t be accessed for some time. So, working backwards…

When I can access my pension at the age of 55, I will be able to use drawdown and this should cover my monthly mortgage cost (and a little bit of bills, but not a lot). This means in reality, I need to look at the time period from now until I hit 55 (or maybe 57 given the governments never ending tinkering).

Realistically this means I need to be able to cover the time through until I can access my pension. To cover this time then the mortgage and bill money needs to come from ISA and cash reserves. For now I will discount cash reserves as they are low at present, but I will gradually increase them. One day I will get to that elusive 6 months of income!

My ISA investments will now cover approximately 10 years of mortgage payments (excluding dividends), subject to volatility. With my current employer this would be sufficient to get me to my pension age, however should I move I will be short by a few years. For these things I always go on a worst case basis, so I am going on the assumption that I will change jobs, or my company will stop the benefit.

This means I am about 2 or 3 years short of mortgage payments. In reality I am adding at least 1 mortgage payment a month into investments and savings, so lets say its 18 months I am short.

If I were to stop my insurance payments, and invest them instead, then in 18 months that would buy 3 more months of mortgage payments, bringing me down to 15 months.

If I were to stop paying the insurance then I would invest the difference into an Investment Trust.

The big question for me is do I risk it? Technically, we could sell up, move to a small property somewhere out of London and be FI already – just not in a lifestyle we would want or be happy with!

If I can cover my side of the mortgage, then we could really tighten the purse strings and survive without moving. Now, if I change jobs (you never know with me!), then I may lose the companies cover which means I will have to cover the whole period.

Right now I am borderline. If I knew I was going to stay in my current company for at least another 3 years then I would just cancel the insurance and throw it into my GTP ISA. I will keep an eye over the next couple of months and then maybe make a decision.

What’s the worst that could happen?

So, flipping it the other way around – what would be the worst case? Suppose I did lose my job and there was no insurance payout – what would I do?

Well first up I would hammer back all expenses to the absolute minimum – no alcohol, tighter food budget (if I am at home I will have time to cook from scratch etc.), and I wouldn’t have to be paying my insurance premiums either. No eating out, no drinking out. I think I could make my cash reserves last probably 8 months when they are back where they should be (right now probably only 5 or 6 months. Sell out my GTP Investment Trust cash replacement would buy me a little longer.

So I could probably stretch to a year before I need to sell anything, in which time I should get dividends to cover another couple of months. Now I would hope by this stage that I would have found another job, or be back earning in some way.

Within this year I would know if I could or could not work again, so assuming I can’t work again then that means we would probably have to make some very tough decisions. In all likelihood we would move out of London, or at least downsize.

As part of the downsizing that would mean we would buy a smaller property with no mortgage and free up a reasonable chunk of cash to generate income. I suspect this would leave me with enough to pay the bills and survive. So from a numbers perspective yes we would be ok, but probably not happy.

So supposing we choose not to sell up? Then I am not quite there yet sadly. I am close I know that much, but still not quite. Cancelling the insurance and investing it would get me there faster, but would remove any peace of mind.

So for now, to help me sleep at night, I will continue to pay the insurance. This time next year however I expect that regardless of where I am working then I will be in a position to cancel it.

What would you do?