Are you the sort of person who wants to cover all possible bases in order to look after yourself and your family? Perhaps you are more laid back and think: “What will happen, will happen!”
Both mindsets are commonplace and understandable, but each has its weaknesses too. The first is noble but unrealistic. You cannot possibly predict everything and be fully prepared emotionally, financially and physically for all eventualities. The second is liberating in the short term but can lead to poorly-laid plans which often bring regret, poverty or entrapment later.
As financial planners, we believe it’s important to acknowledge people’s differences when it comes to personality and future planning, whilst finding a sensible balance somewhere between these two extremes.
In other words, whilst recognising that you cannot fully shield yourself from tragedy and other difficult events which may come your way, it’s a good idea to put some sensible measures in place to protect your family’s finances in a range of unfortunate future scenarios.
For instance, perhaps in the future you or your partner might become seriously injured or ill, leaving you unable to keep earning an income. Or, maybe one of you suddenly dies and suddenly an important source of income to your household is eliminated.
In such situations, your family will likely still have bills to pay, mouths to feed and possibly a mortgage as well. This is where protection comes in.
How protection works
Broadly speaking, there are three main types of protection which you should at least consider within your wider financial plan:
- Income protection provides an income to you in the event that you are unable to work. This usually is reflected as a percentage of your earned income.
- Critical illness cover provides an income or lump sum if you are diagnosed with an illness that is specifically covered within your policy (e.g. a stroke).
- Life insurance provides a lump sum in the event of your death. You can either opt for a set term policy which covers you for a defined period of time, or a life assurance policy which covers you for your entire lifespan – paying out upon your eventual death.
Some people benefit from incorporating all three of these into their financial plan. Others might opt for one or two of these options, whilst for some people (e.g. certain single people with no dependents) they might not need protection at this point in time. It all depends on your individual and unique financial goals and circumstances.
One important activity that you should consider is to think about what would happen if you found yourself out of work for certain periods of time. For instance, would you be able to meet your financial commitments if you were out of work for one month?
Perhaps you have some emergency savings which could cover you, or you have a strong sick pay policy via your employer. However, what would happen if your absence stretched out for longer than a month? In the UK, it is estimated that this happens to as many as one million people each year (out of a workforce of 33m), so it isn’t out of the question that it might happen.
If there is a chance that your finances would come under significant strain in such situations, or that you might even run out of money, then protection is an important area to think about.
How much does it cost?
All three types of protection are, essentially, types of insurance. So, when you take out a policy you usually end up paying a certain premium each month to the insurance company (similar to paying your car insurance, for instance).
How much these policies cost depends on a range of factors. Not only does it depend on the type of policy you are looking at (e.g. income protection vs. critical illness cover), but the premiums can also be affected by:
- Where you live in the UK.
- How old you are.
- The degree of cover you need.
- Your health and current lifestyle.
- How dangerous your job is.
- Your marital status.
The very simplest policies can be as cheap as a couple of pounds per month. However, please remember that “cheapest” does not necessarily mean “best”. In many cases, it is worth paying more in order to secure a higher level of cover and a greater sense of peace of mind.
How do I figure out what I need?
The best option is to speak with a qualified financial planner, who will be able to help you work out how protection fits into your broader financial strategy. They will also be able to help you find the best deals. This type of advice really does typically pay for itself, give the costs that you are likely to save over the long term.
It’s important to think about things on your own as well and consider your position. For instance, do you have young children or do you look after anyone who is financially dependent on you? Do you have a large mortgage which your partner would be unable to pay off on their own? Are you currently retired with no children, but you rely on one person for the pension income? Are you currently a single person in your twenties with no children or dependent, and no significant financial responsibilities (e.g. a mortgage?).
Some of these people are likely to need protection (e.g. examples one and two), whilst others are perhaps unlikely to need it at this time (e.g. the final example). However, this is simply a broad guide and there are instances where exceptions occur. Please speak to an independent financial adviser to receive tailored advice into your own situation and financial goals.
