Preparing for the unexpected
It can be harder to consider the unexpected curveballs that life throws in our way, but if we do not make provision for these, they can throw our life plans severely of course, or leave families without funds if the worst happens.
That is why it is worth considering what is known as ‘protection’ as part of your financial planning, whatever stage of life you are at.
What is protection?
In the context of financial advice, ‘protection’ is a catch-all word for the types of insurance that pay out when bad things happen. It includes life Insurance, which pays out to your beneficiaries when you die, as well as insurance that pays out if you are unable to work due to illness or an accident.
A recent study suggests that we are more likely to consider protection products since the pandemic and that people are mostly likely to buy protection products at the point at which they buy their property1.
But protection is not simply for those who have big mortgages, since many of us have families to support and regular expenditure, even if we have not recently purchased a property.
The right level of protection for you and your family will depend on your financial circumstances, spending and goals for the future, so choosing protection policies is a very individual choice and something that needs to be discussed with a qualified expert.
What types of policy are available?
Depending on your needs, you might wish to consider some of the following policies.
This type of insurance, as the name suggest, pays out money to your partner and/or children if you die or become terminally ill
Some life insurance provides a regular monthly income for the family, while other types of policies provide a lump sum.
Some policies are tied to specific debts - such as your mortgage- and will only pay out if you die during a specific time. This is called term assurance. Other policies, known as whole-of-life-cover, will pay out at any time. Premiums for whole-of-life insurance are generally higher than for term assurance.
Some things to consider is whether you need the payout to remain the same whenever it pays out or whether it can decrease over time (for example if you pay off your mortgage, and whether you wish to discontinue the policy after your children are old enough to be financially independent.
A financial adviser could help you to pick the right policy for you and also help with having the policy written in to trust for the family, which can help with administration and costs if there is a claim to be made.
Income Protection Insurance
If you are worried about how your family would survive if you were unable to work due to illness or disability, this is designed to provide a regular income if you are ill or injured.
Any payout is usually based on a percentage of your earnings and pays out tax free.
You might want to choose between different types of income protection, insurance including some that kick in after an employer stops paying sick pay (known as stepped income protection insurance), and some that rise in line with inflation.
There are also short-term versions of these policies, which may be a cheaper way of ensuring you would be able to pay off specific debts if you were unable to work.
Again, an expert will be able to help you pick the best insurance for your specific circumstances.
Critical Illness Cover
This is a more limited (and therefore often cheaper) version of Income Protection insurance. It pays out a lump sum if you are diagnosed with a critical illness that is named on your insurance policy. In some cases it will pay the same amount no matter the severity of your condition and in others the payment will be severity based.
Typical illnesses that are covered include heart attack and strokes as well as some cancers, while some policies give you the opportunity to name specific illnesses.
Accident, Sickness and Unemployment insurance (ASU)
This type of insurance typically offers short-term payouts (usually around a year) if you are unable to work due to accident, sickness or redundancy (but not being fired from your job). Many insurance companies pulled cover in 2020 due to the pandemic, but some are reentering the market, so you can talk to your financial adviser about what might work for you.
What to consider
Protection policies are not the right thing for everyone, but everyone should consider how their family would be protected if things went wrong.
Before taking out any protection insurance, you need to think about what other types of security you have in place, for example savings or investments, as well as your debts and outgoings and how they might change over time. You may also be covered for some of the same things by a “Death In Service” policy offered by your employer, or by enhanced sick pay policies so check what is available to you already before signing up
Thinking about the unexpected can be a very hard thing to do, but the peace of mind of knowing your family would be protected if anything happened to you cannot be underestimated.