We often have an ‘it will never happen to me’ mindset that means we put off planning for the negative. No one wants to think about becoming too ill or losing their job, but doing so can help you put a plan in place that secures your and your family’s future should the unexpected happen.
Past research from Zurich indicated that around a third of UK adults do not feel they are financially resilient and would not be able to recover easily from a financial shock or loss of income. This figure rises even further to 48% when parents with children under the age of 18 are asked.
Even if you have an emergency fund to fall back on, how long would it realistically last for? And would you have to make any changes to your lifestyle?
While we tend to plan for the future with a single blueprint, unexpected obstacles do happen. The research found that over half of UK adults said they’d experienced unplanned leave from work. There’s no way to predict what will happen, but appropriate financial protection that considers your goals can help provide you with confidence and provide financial security should something happen.
What is financial protection?
Financial protection is a type of insurance policy that will pay out, either a lump sum or regular income, under certain conditions. There are many different forms of financial protection to choose from, which is right for you will depend on your situation and priorities, among them:
- Income protection: This type of financial protection provides you with a stable source of income should you no longer be able to work due to illness or injury. The regular payment will usually be a percentage of your standard salary and will be paid until you return to work or retire. Income protection policies usually have a deferred period, so they won’t start paying out immediately.
- Critical illness cover: Critical illness cover will pay out a lump sum on diagnosis of a condition that is listed in the terms of the policy. Once the lump sum has been paid out, the policy will come to an end, rather than paying a regular income.
- Life insurance: Life insurance will pay out a defined lump sum to your loved ones should you pass away during the term of your policy. It’s a policy that can help your family financially through a difficult time, for example, paying off the mortgage or providing the finances needed to pay school fees.
Why take out financial protection?
Peace of mind: At the top of the list for many people is simply peace of mind. When it comes to our finances, we can often worry ourselves with ‘what ifs’. Financial protection can give you the peace of mind needed to enjoy the present without worrying about what might be around the corner.
Provides you with time: Unexpected events can happen out of the blue without any prior warning. This can make it difficult to cover costs even if you have the assets to do so. Taking out financial protection can provide you with the breathing space needed to get other affairs in order, such as selling investments. It can mean you don’t have to make knee-jerk decisions and instead take your time, choosing the option that is right for you.
Complement existing protection: You may already benefit from existing financial protection, for example, cover included through your employer. However, it’s important to assess if these would fully cover your needs and match the concerns that you may have. For example, a sick pay policy may mean that income protection isn’t a concern for you. However, would your family be provided for if you were to pass away unexpectedly, for example?
Should you decide that financial protection is right for you, it’s not as simple as taking out a policy. There are many options to choose from and the policy should complement your lifestyle and other steps you’ve taken. Among the key things to consider are:
- What level of income is needed?
- What is the preferred length of over?
- How long will the deferred period be?
- Would you prefer an income or lump sum?
Reviewing your financial protection
As with many financial decisions, it’s important to regularly review the level and type of financial protection you’ve taken out. Throughout life, our circumstances, priorities and concerns change, these should be reflected in the type of protection you have. For example, the level of protection a young couple take out as they purchase their first home may not be suitable ten years later, after children have arrived and they’ve moved up the property ladder.
Ideally, you should review your financial protection at regular intervals alongside your wider financial plans and after big life events, such as marriage, welcoming children, divorce or retirement.
If you’d like to discuss financial protection with us or other steps you could take to safeguard your family’s future, please get in touch.