Published on: 27th November 2019
Financial protection can provide you with a financial safety net when you need it most. Whether you already have a policy in place or not, reviewing your finances is important. Could you cope financially if your income were to stop unexpectedly?
Despite being an essential part of financial planning, it’s rarely something people think about. Instead, we often have an ‘it’ll never happen to me’ mindset. Research found:
- 54% of people don’t believe they will suffer from cancer, stroke or heart disease. These are the three major causes of death in the UK
- 22% think cancer will affect them. But statistics show 50% of people born after 1960 are likely to fall ill from the disease
- Whilst heart disease is likely to cause more than a quarter of all deaths, just 17% believe it will affect them
- Strokes are the leading cause of death and disability in the UK. Yet, only 7% think they’ll suffer a stroke
If financial protection is something you’ve been putting off, you’re not alone. It could mean you struggle when obstacles do come up. In fact, 52% of adults would worry about their income if they became too ill to work. This is where financial protection can provide you with peace of mind.
3 key types of financial protection
When looking for the right financial protection product, you’ll find many different options on the market. There are three key different types of policies to consider:
- Income protection: This type of policy can replace your income should you be unable to work due to an accident or illness. It would pay a set income, usually a portion of your salary, until you return to work or retire. It can help you meet financial commitments when the unexpected happens.
- Critical illness: A critical illness policy will pay out a lump on the diagnosis of certain illnesses that are specified in the policy. It’s a one-off payment that can allow you time to recover and pay off large financial commitments, such as a mortgage.
- Life insurance: This policy would pay out a lump sum to your beneficiaries on your death. It can provide peace of mind that your loved ones would be financially secure during a difficult time. It could, for example, pay off a mortgage or fund a child’s education.
When assessing your current financial protection, you should look at how the policies align with your concerns and priorities.
Does your financial protection provide the right level of cover?
If you already have financial protection, how will it provide for you? Reviewing policies to ensure they provide the right level of cover is essential. There are many areas to cover, among them are these four.
What are your outgoings?
How would your current financial protection match up to outgoings? The first thing here is to break your outgoings into two categories; essential and discretionary.
Your financial protection should cover your essential spending. This may include your mortgage or rent, utility bills and day-to-day costs you can’t do without. If there’s a shortfall here it could leave you in a vulnerable position. It may also have an impact on your long-term security.
Next, assessing how protection can help you maintain your lifestyle means reviewing discretionary spending. This could include holidays, hobbies and entertainment.
Income protection policies will pay a portion of your salary, say 70%. This can make it easier to calculate how it’d affect your day-to-day spending. It can be more difficult to understand how critical illness, which pays a lump sum, can support you financially. If you need help, this is an area we can provide support with.
How long would your emergency fund last?
Your emergency fund can provide you with a safety net in the short term. Calculating how long this would support for you can help you choose a financial protection product that’s right for you.
As a general rule of thumb, it’s recommended you have enough in an emergency fund to cover three to six months of outgoings. This can help maintain your lifestyle in the short term and provide peace of mind. This should be in an accessible account.
In terms of financial protection, an emergency fund can mean lower premiums. Income protection, for example, will have a deferred period before it starts paying out. The longer this period is, the lower the premiums usually are.
What provisions does your employer provide?
Many employers will offer financial protection benefits.
This could include death-in-service, providing your family with security should something happen to you. Other employers may offer enhanced sick pay policies. This may mean income protection cover isn’t essential or that you can choose a policy with a long deferment period.
Before you start looking at financial protection policies, check your employment contract and handbook. You may have benefits that are more extensive or not as comprehensive as first thought.
What are your priorities?
Finally, think about what is important to protect. This will vary from person to person and will change depending on your circumstances.
When you first purchase a property, for example, ensuring you can meet mortgage payments may be your biggest concern. As you have children, you may decide that life insurance is essential. This is why it’s so important that you frequently review financial protection, alongside your wider financial plan, at regular intervals.
If you’d like to discuss how financial protection supports your wider financial plan, please get in touch. Our goal is to give you complete confidence in your finances, even when the unexpected happens.