The following guest post is by Mark Meldon, an independent financial advisor (and Monevator reader!) who we’ve noticed talking a lot of sense over the years. We thought we’d ask him to explain some of the more obscure or technical corners of personal finance.

A frustration I often face when talking to individuals is that they have usually first contacted an IFA1 like me because something ‘interesting’ is going on in their lives, such as pending retirement, investing a lump-sum, or some other relatively sexy financial planning matter.

That’s understandable, but not ideal. Rather than firefighting like this, I think it’s important to remember the basics. It’s all about the risk of something unexpected happening, such as illness, disability, or an early demise. These events can quickly wreck the best laid investment plans.

I’ll return to long-term ill-health and critical illness insurance another time. Today, I’ll explain what I think to be a good approach to life cover. (Or should that be death cover?)

Specifically, let’s consider a very useful but often overlooked kind of life policy called Family Income Benefit or FIB.

You’ve never heard of Family Income Benefit?

Perhaps the best way of explaining Family Income Benefit (FIB) is to call it installment term insurance.

Unlike all other kinds of term life insurance, FIB isn’t designed to pay out a lump-sum on death, although your beneficiaries will be given that option should a claim arise. (Hint: Try to avoid choosing this so-called ‘commutation’ option because you defeat the whole purpose of the policy).

FIB, rather, pays out a specific amount of cash every month or quarter following the death of the life insured under the policy. These payments continue from the date of death until the end of the term of the policy that was chosen at outset. The monthly installments are tax-free in the hands of the beneficiaries; these are normally spouses/civil partners and children.

One big benefit of FIB is it completely removes the hassle and risks associated with investing lump sums. You can think of FIB as a kind of temporary guaranteed pension.

For example, let’s say today your youngest child is two-years old. You hope that they will go on to higher education, so you are going to be on the hook financially for about 22-25 years. In this instance you could set up a FIB policy (in trust) with a 22-year term for, say, £2,000 per month benefit (flat rate or indexed policies are available – it’s best to chose indexed ones).

• If you die in year two, your beneficiary will be paid £2,000 per month for 20 years (£480,000).

• Should you die in year 20, your beneficiary would be paid £2,000 per month for two years (£48,000).

As the risk to your chosen insurer decreases with each year that passes, the cost of these policies is very low in comparison with large lump sum policies.

Remember though that lump sum polices will pay out the pre-selected sum insured right up until the penultimate day of the chosen cover period.

Family Income Benefit in action

Some years ago now I met a police sergeant and his wife. At the time their only child, a daughter, was about seven-years old. Whilst he had a very decent pension, they had a mortgage and I arranged a lump sum policy to cover that, and also FIB on both husband and wife as separate arrangements at the same time.

Whilst his wife and daughter would benefit from a decent police pension had he died, the idea behind arranging the FIB was to cover the school fees they were committed to paying.

His FIB was arranged to run over 18 years up until their daughter was about 25. Norwich Union (now Aviva) was the FIB provider. The sum insured was £12,000 a year, going up in payment by a fixed 5% p.a., compound (that’s important).

About three years after I arranged all of this, they bought a semi-derelict house and started renovation work whilst living in a caravan on site. Sadly he then got sick and died after some months of struggle

The lump sum policy paid off the mortgage and the police dependants’ pensions started shortly thereafter to help with his widow’s everyday living needs. The FIB also swung into action. That little policy paid out for 15 years and took their daughter through private school, university, a masters, and almost covered her time undertaking a PhD. Nearly every time I see the widow and her daughter, they mention that simple little FIB policy:  “We didn’t have to think about investing the money, it just arrived every month”.

The FIB was written into a simple trust at the outset. The payments were all tax-free and paid very promptly. I recall that the monthly premium all those years ago was £6.02.

FIB ticks a lot of boxes and can be used for other things aside from family protection. I’ve used it for alimony insurance in divorces/separations, and as a kind of pension source for the spouses/partners of small business owners.

Where can I buy a FIB policy?

Whilst an IFA will look at a wide range of insurers – and be paid a modest commission for placing the policy – it is possible to buy a FIB policy directly from an insurance company.

At the moment, there are seven major providers offering competitive FIB policies: AEGON, AIG, Aviva, Legal & General, LV=, Royal London and Scottish Widows.

Whilst these policies all have the same underlying concept, they differ as far as the extra cost (but valuable) indexation, waiver of premium, and the much more expensive critical illness insurance riders are concerned.

These optional benefits can be well worth having. As with everything, the lowest priced contract isn’t necessarily the best value!

What might FIB cost?

Whilst all life insurance companies will carefully underwrite new policies based on your health and lifestyle, the majority of FIB applicants can expect to obtain standard terms. The younger you are, the less expensive it will be.

For example, a male non-smoker aged 38 choosing a FIB policy running for 22 years with an indexed sum insured of £2,000 per month might expect to pay between £18-21 per month for a plan (Source: The Exchange). The premium and sum insured in this example will go up each year in line with the indexation provision under the policy. This is often linked to the RPI2.

An IFA would be paid commission for arranging this insurance policy. (They are non-investment policies, so commission was retained after the RDR in order to try and maintain sales). The IFA would have the choice of an up-front payment or throughout a defined term of the policy.

In this example, the up-front commission would be about £400, or something like £11 per month for 48 months and 50p thereafter. My preference is to not take up-front commission.

Things to remember with Family Income Benefit

• It’s cheap, because the risk to the insurer reduces each year.
• If you chose the indexation option, you pretty much obtain a zero risk, guaranteed, secure, regular tax-free income stream for your beneficiaries from the date of death to the end of the chosen term.
• The marketplace in the UK is very competitive so premiums are very attractive, in my view.
• One of the main purposes of purchasing a life insurance policy is to provide a fund to replace the earnings you were contributing to the family pot. Rather than undertaking complex decisions at a time of grief on what to do with a large lump sum, your beneficiaries may well prefer a FIB to cover their everyday living experiences.
• It is much better to choose the indexation option at outset, in case living costs rise a lot in the future.
• Don’t over-insure; the policies you take should be appropriate to your current and future plans.
• I rarely arrange FIB on its own; the provision of an additional lump sum of a reasonable amount can provide a ‘dip-into’ fund for one-off costs and will help preserve the guaranteed income stream from the FIB policy.
• You will get asked lots of health and lifestyle questions when you apply. Your answers must be truthful. Most cases of refusing to pay out are due to non-disclosure.
• Notwithstanding that point, something like 98%-99% of all claims are met by the UK’s life offices.
• Shop around on-line, or hire an IFA to sort all of this out for you.
• Finally, don’t procrastinate if you have identified a risk you need to cover with insurance. Things change – and if you get sick then you might not qualify for cover at all.

Mark Meldon is an Independent Financial Advisor based in Cheddar, Somerset. If you need an IFA closer to home, try the directory at Unbiased. You can also read Mark’s other articles on Monevator.

1. Independent Financial Advisor [↩]
2. Retail Price Index, a measure of inflation [↩]

Politics, then the best of the articles I read this week.

After last year’s ill-advised EU Referendum and its even more malodorous result left me impotently railing, I wondered whether I shouldn’t have done more politics on Monevator beforehand. Readers from both sides of the vote asked me the same thing.

The truth is mostly that as a fully paid-up member of the Liberal Elite, I hadn’t ever really believed the British electorate would dislike their own feet in sufficient numbers to start blasting away at them.

A sizeable cadre of constitutional diehards? Sure, and a smattering of undesirables. But a winning majority?

Well, we know how that turned out. A Coalition of Incompatibles voted Leave for a dozen different reasons, and here we are.

Yet metropolitan arrogance wasn’t the only thing that stopped me. While I write about these things from time to time because I’m a blogger and writing is what I do, politics isn’t something I claim any expertise in and this site is meant to be about investing.

So I also didn’t want to waste your time and attention.

The depreciated pound in your pocket

This is also why I haven’t written much about next week’s General Election. Besides, for many people – including most readers of this blog – there isn’t a great deal in it between the major parties, from a financial perspective anyway.

Consider this analysis from the Institute of Financial Studies (via David Weston on Twitter):

Okay, so this seems to ignore any secondary impacts from other policies. (Labour going heavy with the old tax-and-spend routine and thwacking the economy, say, or the Tories turning us into Sterling Singapore). But that aside, the relative proximity of the Conservative and Labour impact lines is clear.

The Liberal Democrats are the outlier, and it would be tempting to say that’s because as the perennial third-party they’ve not put forward real policies. Except they actually have pledged to increase income taxes by 1% across the board. That money is said to be earmarked for the NHS.

• Read the Liberal Democrat manifesto’s key points at the Evening Standard.

As for the two main contenders, unless you’re somewhat income poor or very income rich, it doesn’t seem to matter much which party wins.

Of course, that still leaves 30-40% of people for whom it really does matter – and that’s where all the rhetoric and debate is focused.

Labour’s whacking of the wealthiest stands out, and it’s easy to accuse them of old-fashioned class war. But then when you look at who has done well since the financial crisis, it’s pretty clear it’s the richest, mostly through rising house prices and buoyant stock markets.

Indeed, the more I think about Jeremy Corbyn and his Labour manifesto – which instinctively I don’t like at all – the more I’m left thinking if you’re not going to vote in some old-school redistribution now, in our current circumstances, then when?

• Compare the financial points from the Tory and Labour manifestos at ThisIsMoney.

There’s an awful lot NOT to like about this Labour party, especially its front bench. I’ve spent years bemoaning them to my far more lefty friends. (I’m nearest to a New Labour sort at heart. Or better yet the US Democrats.)

And yet the Tories and Theresa May… give me strength.

May be not

When the election campaign began I was aghast at May’s authoritarian overtones, yet that now represents something of a high point in my feelings about her.

It’s one thing to adopt the mantle of a one-party State tyrant if you’ve actually got the swagger and political vision to pull it off. But May increasingly seems little more than a cipher.

Making the election campaign all about Mrs May has backfired spectacularly. Instead of a clever Machiavellian schemer who, for instance, brought her enemy Boris Johnson into the cabinet to neuter Brexiteer opposition, I’m more inclined these days to see a weak and flip-floppy opportunist.

Her imminent opponents in the Brexit negotiations must be rubbing their hands with glee.

So much for May’s character. But the mendacious immigration target aside, I don’t mind the Conservative manifesto too much, despite claims that when you run it through a computer simulation the UK collapses. Even the so-called Dementia Tax was a fairly progressive piece of legislation in the eyes of someone like me who’d love to whack up inheritance tax.

Squint a bit and – thanks to the lack of detail – you can almost see a Tony Blair-style Labour leader campaigning under this Conservative manifesto.

But then I look at the distribution in the graph above, and again I think about how we’re now nearly ten years into austerity, and I reconsider…

Today I read that even Blairite Alastair Campbell’s son is going to vote for Corybn.

Of course I’m concerned about this flavour of Labour hiking taxes and going on a spending spree. But I watch videos like this harrowing one about a disabled woman who can’t walk risking her life going down the stairs and I wonder where even the taxes I’m paying are going, if not on helping somebody like her?

The UK’s tax take is about average at around 33% of GDP. I’d see it rise by 1-2% if it meant I’m not confronted by videos like this.

On the other hand, I wouldn’t support higher taxes if they’re just going to slosh into public sector inefficiencies and wage hikes, and closed shop ‘that’s not how we do it around here’ stasis.

Which let’s face it, they at least partly would.

Party pooper

You see, I’m no party political animal. I’ve voted Conservative in my time, and I’ve even voted Green in local elections. I’d vote for the Liberal Democrats in this one if only for their stance on Brexit, but it’d be a wasted vote in my constituency.

•  For a great explanation (with cool interactive tools) on alternative voting systems, go read this. Especially if you’d prefer not to have to vote tactically, which as things stand you probably should if you don’t want to see a Conservative government.

The Economist has also plumped for the Liberal Democrats, daydreaming about how:

“…the whirlwind unleashed by Brexit is unpredictable. Labour has been on the brink of breaking up since Mr Corbyn took over.

If Mrs May polls badly or messes up Brexit, the Tories may split, too. Many moderate Conservative and Labour MPs could join a new liberal centre party—just as parts of the left and right have recently in France. So consider a vote for the Lib Dems as a down-payment for the future.

Our hope is that they become one element of a party of the radical centre, essential for a thriving, prosperous Britain.”

Um, that isn’t going to happen, The Economist.

What an uninspiring choice. The three main parties are like an unwinnable version of the rock-paper-scissors game. Corbyn’s unpleasant friends in his past versus May’s gruesome friend in the White House versus Tim Farron’s lack of friends among the electorate. Labour’s timely redistribution versus the Tories finally raising the higher rate income tax band versus the Liberal Democrats’ penny on income tax to fund the NHS that most of us cite as a top priority. Corbyn being right about Iraq versus May’s not faffing up in the Home Office versus Farron’s principled approach to the Brexit car crash.

On and on and on. (Oh yeah, THIS is why I don’t do party politics…)

At least a Conservative coronation now looks less likely. That’s perhaps the best reason to vote Labour – and maybe especially if you voted for Brexit. Less than a year after the Referendum and May has already been treating the opposition with contempt, calling elections for her own political ends, refusing to engage with the public, and asserting without evidence that she needed a General Election to give her a mandate to negotiate a Brexit that her own party’s machinations got us into.

It can’t go on this way. If we won’t have a European parliament in the mix anymore – if you want our politicians to be in control of our future – then our own Parliamentary system needs to do better.

[continue reading…]

Looking to gain financial freedom by starting your own business? I’d urge caution. Most well-paid employees are better off sticking with their jobs, spending less than they earn, and investing the difference in the markets over the long-term.

Don’t get me wrong: I’m self-employed, and I’d only go back to corporate life as a last resort. I’ve also worked for several start-ups, and I co-founded one that’s still in business.

I can confirm that start-up life can be exhilarating, especially if you really believe in your product or service.

But as a sensible route to modest wealth, I’m skeptical.

I also believe there are far better ways to secure lifestyle freedom than starting your own business.

Here are seven things to consider before quitting your day job. If you’re going to take over the world, it surely pays to know your enemy?

1. Your innovative business will almost certainly fail

I know it’s a great idea. I understand you’ve done years of research, talked to friends and family, and maybe even started working on the business in your spare time (good – but watch out for legal claims by your employer).

Will you succeed? If you’re opening a Subway franchise or taking your current skills freelance, perhaps. But if you’ve thought up, say, a new Web technology, then you’re more likely to make a splash in the deadpool.

Like writing a novel, starting a business is easy to do, yet the outcomes are hugely polarized between the handful of highly visible winners and the sunken iceberg of also-rans.

Hundreds of thousands of novels are written every year. A few thousand make it into the bookstores – where only a tiny number remain on sale for years. Similarly, while we all know the success stories, most innovative businesses fail. And while your business is failing, you’re not getting paid – in fact, you’re probably seeing your savings disappear.

This isn’t to decry the idea of starting a company to try something new. It can be an amazing ride, even if you do fail. You’ll learn all kinds of new skills, discover late night takeaway food you never knew existed, make great contacts, and maybe even create something cool.

But statistically speaking, rounding down to two decimal places: there’s next to no chance of your innovative start-up business making you rich.

Better to find ways to live like a billionaire without risking your life savings.

2. Your start-up business will destroy your life

I don’t mean that being a start-up CEO will kill you (though it might). I mean you can kiss goodbye to your current way of life.

Unless you’re very lucky (as opposed to talented or smart, which aren’t enough to guarantee anything) you’ll work harder at your own company than you’ve ever worked in your life.

Evenings and weekends will become merely annoying breaks where it’s hard to get hold of employees and customers (not that it will stop you trying). The gym? A tax on your good intentions that you’ll pay in January and rue as your weight balloons – assuming you find the time to eat.

If you’re lucky then after a year or two you’ll fail and get a job before the medical, financial or social damage becomes too great. Perhaps you’ll even get a pay rise, thanks to the new skills you’ve learned.

But many businesses do not fail fast – rather they just never really succeed.

If you’re unlucky you’ll limp along for years, working twice as hard for half your old income, and never getting that reality check.

If you’re very lucky you’ll succeed. Maybe you’ll point out this gloomy article in a speech at an industry awards dinner!

But by then you’ll know just how fortunate you are.

3. You’ll be too busy to make any money

My father used to work with a Cambridge PhD who hadn’t been promoted in a decade. It puzzled my dad, since the guy breezed through his day job with obvious ease.

Did he lack ambition? Had he done something untoward with a senior manager’s wife? No, this man eventually explained to my father: he was just too busy making money to handle a promotion.

I don’t remember how the guy made money exactly – I heard the tale when I was a kid. I think it was stock picking, but it could have been betting on the horses. I do remember though my father explaining with obvious incredulity that his clever workmate admitted he only ever ‘worked’ until his lunch hour. In the morning he’d conscientiously do what was demanded of him by his employer (but no more) and then after lunch he’d concentrate on making real money.

I don’t know if you’d get away with this in today’s office environment (where you need a guidebook just to survive). But if I was still in an office that’s probably what I’d be doing, whether it be researching shares, working on new income streams like an eBay store or god forbid blogging, or simply taking it easy and saving myself the medical expenses of an early heart attack.

Start a business and you can forget all about such freedoms.

A capable friend of mine who runs her own company has spent two years trying to find time to set-up a passive index tracking fund.

Don’t think she’s lazy or stupid (though I’ll grant you she’s disorganized). She simply believes she should put some thought into how she’ll invest for the next 20 years, but she hasn’t found or made the ‘headspace’ to do it. (C., if you’re reading here’s why you should invest in an index fund. Again).

At least my friend hasn’t given her funds to a sub-optimal financial advisor to piss down the drain of high charges and chasing hot sectors.

I dread to think how many time-starved entrepreneurs have to work twice as hard because they outsource their finances to idiots who whittle away their returns.

4. Friends and family will become tick boxes you ‘do’

• Your husband or wife will give up trying to make dates with you in your own home.
• Your girlfriend and boyfriend won’t be your girlfriend or boyfriend soon enough.
• Your soulmates will be the people you pay at the end of the month.
• A former workmate will show up in a fancy car looking healthy and inviting you to take a rejuvenating weekend break at his new holiday home, which you can’t afford the time to go to, let alone the travel fare, let alone the mortgage.

Okay, I’m exaggerating. A bit.

Your spouse may have an affair instead, just in case your company does strike it big.

5. Your talents and skills will wither away

Love writing code? Don’t start a software company.

Love writing? Don’t start a publishing company.

Born to cook? Stay out of restaurants.

The boss of any successful company isn’t the top artist or craftsman. He’s the top sales guy, the rainmaker, the inspirational leader. And that’s fine, unless you love what you’re doing.

The best model for a start-up CEO is Steve Jobs. He was bright, brilliant, interested in everything – but essentially unemployable.

If your job is your vocation and you’re good at it, you should probably keep doing it. Don’t trade it in for paperwork and worrying about the bills.

6. You’ll spend all your time dealing with staff issues

Here’s a dirty secret that few business books will tell you: Half of a start-up founder’s time is spent dealing with people.

Ultimately your team is the key asset that will mean success or failure for your company.

Unfortunately they are also human beings who will:

• Get sick, sometimes seriously
• Have elderly or infant relations who will get sick
• Get sick of someone else on the team
• Believe someone else is jeopardizing the whole project
• Be the person who is jeopardizing the whole project
• Fear they’ve made the wrong move in joining your start-up, and take up half your time and theirs with demands for motivational pep-talks

Perhaps you relish all this. You certainly should if you’re starting a company.

If you don’t, then there are libraries of literature written about how to deal with people. I don’t have the answers – I’m just warning you to get reading.

With luck it’ll stop you starting a company in the first place.

7. It will be you who takes out the trash

Hey, Trump Jr., you know that superstar team you’ve recruited? You forget to include someone who’ll manage the company website. Also, there’s no one to sort out the phone lines into the office. An office that has no furniture in it because only you have a company credit card, which means it’s you who has to go shopping for desks and Macs.

Et cetera, et cetera.

Trust me on this – however efficiently and comprehensively you delegate, at some point you’ll empty the bins, clean up the junk mail, and be the person who sorts out the broadband.

And then on Tuesday you’ll have to do it all again.

Don’t think this stops when the business takes off; you just get a classier version of the jobs no one else wants.

Why? Because those jobs have to be done and it’s YOUR company, so you’ll do them. You’ve got by far the most to lose.

So should you start your own company?

Starting up a company comes with a great undertow of extra work to keep yourself in business, even before your innovative idea has been brought to market.

Don’t think a Venture Capitalist is going to pay for that. Unless you’ve got a proven track record of starting companies (in which case you’re already rich and none of this applies) then VCs will want to see you’ve put your life into your new company before they’ll invest. They want their money to go entirely into bringing your new product or service to market, not on making your life easier.

In summary:

• If you truly want to be the next Steve Jobs and you’re prepared to risk being just another Joe Schmoe, then you should start your own business. You only live once.

• If you’ve got a great idea, a desire to change the world, and you truly believe failing would be better than doing nothing, then start a company.

• If nothing less than $20 million in the bank will do and you can’t sing, act, or kick a football like Lionel Messi, then starting a business might be your only option.

For most of us though, I believe a better solution is to save and invest enough money to make your job optional.

Still want to start your own business? Good for you, I wish you the best of luck! I’d also suggest you email this article to your fellow co-founders or employees.

Best to shake out the weak before you get started…