Posted on 30/10/2024 by Mark Dunning
It turns colder and that’s where it ends. The nights are drawing in, the temperature is dropping and so are the leaves. Some things in life are inevitable. We can only ignore them for so long. We cannot make them go away but we can put plans in place that make them easier to deal with and financial protection is a way in which we can cover (to an extent) the unexpected.
Not everyone needs financial protection, so a practical approach is to consider what your monthly essential costs are and how comfortably you would be able to meet them if your own income was reduced or stopped. It is also sensible to think about your general health and age, as unfortunately both our obligations and potential health issues can start to mount up as we get older. Key life events such as the purchase of your first home/property, getting married, starting a family also represent review points. These review points will continue as you go through life, for example, where your family structure changes (more/less dependants, retirement, divorce or even death). Again, some unpleasantries in there but if life is life, then so is death.
Financial protection is essentially a type of insurance. It involves a range of products which can cover you and your loved ones. It is important not to fall into the trap of assuming you will not need it at some point - take a look around.
Life insurance, Critical Illness Cover, Family Income Benefit and Income Protection are the main types of financial protection products available.
Life insurance pays-out a lump-sum to your chosen beneficiaries when you pass away. There are different types of cover to choose from but the most common is one that protects a mortgage – this can be a ‘decreasing term’ for a repayment mortgage and a ‘level term’ for a mortgage that is on an interest only basis. When it comes to how long your policy lasts, there are two types of life insurance, whole of life and term assurance. A whole of life policy continues until you die, so a pay-out is guaranteed e.g. funeral cover or estate planning, while a term policy is for a specific period of time and pays-out if you die during that period e.g. covering the term of your mortgage. Life insurance should be considered by anyone who has an outstanding mortgage and/or financial dependants. A thought - as well as paying-off the mortgage, a lump-sum could provide an additional cash buffer to ensure your family’s financial security as servicing debt(s) will not represent your entire outgoings.
Critical illness cover provides you with a lump-sum if you are diagnosed with one of the critical illnesses covered by the policy. The lump-sum could be used to help pay-off the mortgage or other debts, or adapt living arrangements to your new circumstances (or both). Critical illness policies vary enormously from one provider to the other, both in terms of the types and severity of illnesses covered. If you don’t think your savings would cover you if you became seriously ill, critical illness cover could be well worth considering.
Family Income Benefit is another term assurance policy that also pays-out on death. However, instead of providing a lump-sum, it pays out a regular income to your chosen beneficiary from when you die until the end of the policy. For example, if you took out a 20-year policy and died after 15 years, it would pay-out for five years. As its name suggests, family income benefit is aimed at families who want to provide their surviving partner with an income for a set period of time. It could help pay for school fees and other activities, as well as essential bills. This can prove vital whilst you have children/dependants.
Income Protection pays-out a regular income to the policyholder if you are unable to work because of an accident, bad back or illness including a mental illness like depression. You can select how soon after a diagnosis you want the payout to start: this is known as the deferred period. In general, the longer the deferred period, the lower your premiums will be. You can also choose between short-term cover, which might pay income over one to two years, or long-term cover, which typically runs until retirement or when the policy ends (whichever is sooner). If you are self-employed or your employer only provides statutory sick pay, income protection could prove especially valuable. With Income Protection, you can claim more than once on your policy.
If you work for a company, it is worthwhile investigating the benefits package on offer to see if protection forms part of it. Companies often buy policies as group schemes which their employees can benefit from. Beyond that, you can look at popular comparison sites to understand the products on offer and their relevant pricing and do your own research on the companies within. If you are unsure about what you might need and what best meets yours and your family’s requirements, this is an area certainly well worth discussing with a financial adviser. An adviser can identify points of vulnerability and put together a tailored package covering you and your family. So whilst the unexpected is always out there, you can at least have the peace of mind in knowing that you have done what you can to protect your finances.
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.
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