Why financial protection could help your wealth and your health

Research by Cancer Research UK provides a startling statistic, as it reveals that one in two Britons will develop cancer at some point in their life. While being diagnosed with a serious illness can be stressful enough, the stresses can be significantly increased by financial worries if the sickness means you’re unable to work.

A lesser-known fact is that employers are not always obliged to provide sick pay, which means they could stop paying your salary after just a month. If they do continue to pay you, it’s usually for three to six months, after which your income is likely to be stopped or significantly reduced.

If your employer does pay you Statutory Sick Pay (SSP), it’s unlikely to maintain your standard of living. In 2023/24, it pays just £109.40 a week for 28 weeks, providing you with slightly more than £3,000 in total.

A serious illness could put your financial security at risk

If your income stops, you may have to rely on your savings to meet your financial commitments. This may mean that you deplete them, which in turn could put your financial security in jeopardy.

Furthermore, without a salary you might not be able to service your mortgage repayments or meet your monthly outgoings, which could put your home and your lifestyle at risk. That said, it’s not only the short-term implications of not being able to work that you need to consider.

If your income dries up you may not be able to maintain your pension contributions, which could put an end to your dream retirement. It’s not all bad news though, as you may be able to protect your income so that you can maintain your lifestyle both now and in the future.

Let’s look at this in more detail now.

Income protection provides a tax-free income

Income protection typically pays a monthly income that’s free of Income Tax, which can then be used to maintain your lifestyle and meet your monthly outgoings. More often than not, the cover is deferred for an agreed period, and the longer this is the less your premiums are likely to be.

If you receive sick pay from your employer for a period of time, you probably want to start the income protection payments when your salary ends, as this means you’ll receive a continuous income.

As the amount you receive is not typically liable to Income Tax, payments are normally around 60% of your regular income and will continue until you return to work, retire or the cover ends. That said, this will depend on the type of cover you decide to take and the amount you earn.

While the illnesses you can receive cover for will depend on the protection provider you use, it will normally pay out if you are diagnosed with cancer or suffer a heart attack or stroke and are unable to work for a period of time.

Critical illness cover could pay a lump sum

If you’re diagnosed with a serious illness, critical illness cover (CIC) could provide you with a tax-free lump sum that can be used as you see fit. The lump sum payment could provide private medical treatment or medication not available on the NHS. Alternatively, it could be used to repay debts, modify your home if necessary, or to provide an income.

Like income protection, the illnesses covered will vary depending on provider, however it’s likely to pay out if you suffer a heart attack or stroke or are diagnosed with cancer.

Financial protection means you could fully recover before returning to work

According to an article in HR Grapevine, the cost of living crisis means that more people are returning to work too early after an illness because of financial pressures. If this is something you were forced to do, it may slow your recovery or result in your illness returning.

Protecting your wealth could ensure that you can take as long as you need to fully recover, and you don’t need to rush back to work. As this is likely to provide peace of mind for you and reduce stress, it could also mean you’re able to recover from an illness more quickly.

The cost of your protection will depend on several factors

The cost of income protection and CIC usually depends on a variety of factors, which include your age and medical record. Other factors that will be taken into consideration include:

  • your family’s medical history
  • how risky your job is
  • how much income you would like
  • any high-risk hobbies you might have
  • the deferment period you want to take.

Always remember that you’re unlikely to be covered for pre-existing conditions.

Get in touch

As you can see, taking out a protection policy such as income protection or CIC means that you’re more likely to cope financially if you’re diagnosed with a serious illness. That said, you may also want to consider having both as part of your financial plan, as income protection could allow you to meet your overheads while a CIC payment may pay for treatment that could speed up your recovery.

If you would like to discuss these and other ways you may be able to protect your wealth, please call on 01527 577775 or speak to one of our advisers as we’d be happy to help.


Monday 23 October 2023