24th May 2018
With new data from The Money Charity showing that almost 10 million people in the UK have no savings, it’s time to talk about financial protection again.
It can be easy to feel like your finances are under control. You have two incomes coming into the household, the bills are paid in full and on time and your credit is manageable. Maybe you even have spare cash for holidays and treats? You’re sorted.
But what happens if your household suddenly loses an income? Unfortunately, it can happen without warning and is probably more common than you think. In fact, it has been estimated that around one million people will have to take time off work due to illness or injury each year (Source: ABI).
What should you do about it?
You could shrug your shoulders, say “these things happen” and risk taking a hit to your finances which could affect your family for years. You could even bury your head in the sand and assume that, since nothing bad has happened to you thus far, it never will.
Or, if you’ve got your sensible hat on, you could read on to learn about the financial protections available and how they could protect your family in the face of an unexpected situation.
Two main sources of protection
If something were to happen to you or your partner which resulted in a blow to your household finances, your first source of money should be internal; your savings and emergency fund.
This fund should be carefully planned and kept in the right place; i.e. an account which allows instant access, rather than chasing high interest rates or tying your money up in fixed-term bonds. It should also contain enough to make sure the bills are paid, and that life can continue for three-to-six months without too many adjustments being made. It should also contain a bit extra in case the emergency, whatever it is, incurs costs due to damaged property or healthcare needs, for example.
Your emergency fund, or buffer, should be able to keep you going until the second source of financial protection is available; pay out from your insurance policies.
There are three key insurance types to consider, depending on your circumstances and needs as a family:
- Life Insurance, which will pay out a lump sum if you die while the policy is in place.
- Critical Illness Cover, which pays either a lump sum or income to you and your family, if you are diagnosed with a serious illness which is covered within the terms of the policy.
- Income Protection, which replaces a portion of your usual income if you are unable to work through illness or injury.
Taking out insurance is one of the easiest ways to protect yourself and your family in the event of an emergency which affects the household finances.
Insurance also offers the benefit of paying out no matter how long you have held the policy, so whether the worst-case-scenario becomes reality in one year, or 10, if your policy is current, you can expect the same level of protection.
Of course, for some people the idea of taking out Life Insurance or Critical Illness Cover leaves them feeling cold. With many giving a variety of excuses against investing in protection for their finances.
- “Providers don’t pay out”: Every year, insurance providers release their pay-out rates, that is, the percentage of annual policy claims which have resulted in a payment being made. Most providers are consistently reporting numbers of 97% and above, so it may be time to rethink the negative attitude.
- “Premiums are too expensive”: Each month that you pay money to a company and receive no tangible benefit or product in return might feel like you are throwing that money away. However, if the worst were to become reality and you had to rely on that same policy to support you after an accident, the benefits and value of the service would soon become apparent.
- “I’m never going to need it”: Even Superman has his weaknesses. While we hope that illness, injury and accidental death won’t befall you, the odds are not always in your favour. Therefore, it is worth having the cover, even if you feel particularly immortal right now. In addition, the younger and healthier you are when you take out the policy, the lower your monthly premiums will be.
How financial advice can help?
Depending on your era, you will either attribute the phrase ‘You don’t know what you’ve got ‘till it’s gone” to Canadian folk singer Joni Mitchell or California-based rockers Counting Crows. Whatever version gets your toes tapping, the sentiment rings true. A financial planner will begin by looking at your current situation, and you may find that you don’t realise just how much was at stake until someone with an outsider’s perspective points it out.
By analysing what you have, and what you would need in the event of a financial crisis, an adviser will be able to point you in the right direction and make suggestions as to how you can best protect you, your partner, children and property, against the curveballs life may have waiting for you.
To learn more about financial protection and how your family could be affected by the loss of an income, please get in touch with Ben on 0113 262 1242.