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When in debt we are all looking to try and save money on unnecessary expenditure. Generally one of the first things to go is luxuries, which unfortunately many people deem to include insurance.
We are all aware that you must insure your car - it's the law. However did you know that failure to maintain buildings insurance is breaking your contract with your mortgage lender, or what the catastrophic effect of not having even the most form basic of life cover can have if you die?
An insurance review should form part of your overall financial review when considering entering a trust deed, IVA, Bankruptcy or Debt Management plan, or even just making an agreement to pay with your creditors. You could end up paying them extra money which could have been used to protect your home or even more importantly your family.
It is also vitally important to review any cover you currently have, particularly for Life Insurance and/or Critical Illness cover. Did you know that in the event of your death, the money paid out would not automatically be used to pay off your mortgage or pass to your family in the way you thought it would? In actual fact it passes to your estate which has a duty to pay off all your debts before paying the balance (if any!) back to your family.
Well in essence this means that as your mortgage company have security over your house, they would take possession of this and sell it off for what they can get. I have heard of situations where they have sold for up to 50% less that the property was purchased for. Any balance they have left (including their large legal and administration fees) is then claimed against the estate along with the other creditors leaving a very real possibility of there being very little or nothing left to pass on to the family. In essence you have faithfully paid your premiums and your creditors have reaped the benefit.
It will surprise you to know that this is a situation that can very easily be avoided by placing your protection arrangements in Trust. This stops the insurance payment becoming part of your estate and can if done correctly stop creditors getting their hands on any of the funds at all, allowing the money to pass onto the people you envisaged it would go to in the first place.
In summary whilst it may be prudent to review what insurances you do have, it should not be the case that you do not hold any cover at all. It is also vital to ensure that what covers you do maintain are organised correctly to ensure you and your loved ones benefit and not your creditors.
by Gordon McArthur,
