Selecting a Financial Protection Product
Before you take out a financial protection policy, you must ensure it’s the right product for you. Financial protection can help provide you some security if you were to become ill or involved in an accident.
Are you thinking about taking out a financial protection product? It’s a step that can help improve your resilience and give you peace of mind.
What is financial protection?
Financial protection products are essentially insurance policies that pay-out when you’re unable to earn an income. Taking out the right policy for you can improve financial confidence.
Broadly speaking, there are three different types of financial protection products to choose from. Life Insurance, Critical Illness Cover and Income Protection. The one which is right for you will depend on your circumstances, concerns and priorities.
With all three types of protection policies, they typically have no cash in value at any time. Also the cover will stop at the end of the term. Therefore, you need to keep up to date with premiums or the cover may be lost.
The three different types are featured below:
Life Insurance
Life Insurance is there to help protect both your mortgage and family after you have died. There are many different types to choose from.
Critical Illness Cover
Critical Illness Cover pays a tax-free lump sum, or a monthly income.
This happens on diagnosis of any serious illnesses.
Income Protection
Income Protection provides an income if someone can’t work because of ill health or an accident. You choose the amount you wish to insure.
When do you need financial protection?
It’s typically a significant life milestone that triggers purchasing financial protection. For example, buying a house or starting a family are the top two reasons for seeking protection, according to Royal London. A friend or relative falling ill or dying is also thought to be one of the triggers people start to look at how secure they are and the steps they can take.
However, if you or your family would struggle to cope financially should something happen, looking at your options is important.
No one wants to think about becoming seriously ill or injured. We often have an ‘it will never happen to me’ mindset. Yet, the reality is that thousands of people’s financial security are put at risk because of circumstances outside of their control every day.
Critical Illness Claims
Figures show the following illnesses have the highest number of critical illness claims:
- Cancer makes up 60% of critical illness claims. More than 363,000 new cases of cancer are diagnosed in the UK every year, more than 990 new cases every day, according to Cancer Research
- 16% of claims are made to those affected by a heart attack. Statistics from the British Heart Foundation show heart and circulatory diseases cause more than a quarter of all deaths in the UK, almost 170,00 each year. Coronary heart disease is the most common type and the most common cause of a heart attack. Each year there are more than 100,000 admissions due to a heart attack.
- Patients that have suffered a stroke make up 6% of all claims. The British Heart Foundation research also shows that strokes cause over 36,000 deaths in the UK and are the biggest cause of severe disability.
Of course, it’s not just critical illness that may mean you’re not earning an income for a significant period of time. Other forms of protection can help you cover a period where you’re not earning due to an accident or illness that may not be considered critical too.
Choosing the right financial protection product for you
How long would your emergency fund last?
Before you start looking at financial protection products, you should seek to understand what financial safety nets you already have in place.
If your income were to suddenly stop, how long would you be able to cover outgoings for?
As a rule of thumb, it’s advised that you hold three to six months expenditure in an easily accessible cash account. This is designed to give you some breathing space should you face a large bill or your income falls. Yet, according to research from the Yorkshire Building Society:
- One in four people’s savings would last them less than a month
- 15% of people admitted to having no savings at all
- In fact, only 42% believe they’d be able to rely on savings for at least three months
The risk of financial insecurity if income stopped isn’t just an issue affecting low earners either. Two in five people earning more than £100,000 say that without a job they wouldn’t be able to cope financially for longer than three months.
Understanding how your current provisions will cover outgoings means you’re in a better position to select a policy that suits your current financial position.
Do you have any existing policies?
Don’t start looking at new financial protection policies before fully understanding those you may already hold. You may decide that an additional policy will be worthwhile. Or that you can end the current one. Or that you should simply stick with what you already have in place.
Even if you do already have financial protection in place, it’s advisable to assess its suitability. Your situation and priorities may have changed since taking it out.
It’s also worth remembering that your employer may offer financial protection as part of your benefits package. For example, you may benefit from enhanced sick pay or life insurance. It’s worth checking your contract and speaking to Human Resources if you’re unsure. This will ensure you aren’t covered for the same thing twice. Also will help to select a policy that complements any existing cover. As an example, if your employer offers extended sick pay, you may be able to opt for a longer deferment period to reduce premiums.
What type of cover do you need?
There are several different types of financial protection to choose from. Therefore, you will need to decide which is the right option for you. This will be dependent on a range of factors. Such as what your priorities are and other measures you already have in place. For example, for some people, receiving a lump sum to pay off the mortgage would be preferred over a monthly regular income to cover outgoings.
It can be difficult to understand which policies are best suited to your needs and circumstances. If you’re unsure which option to go with, or whether you’d benefit from a combination of policies, we are here to help.
Our advisers will take the time to understand your situation, concerns and current financial situation. We will then offer advice on appropriate options you could choose. In some cases, there may be other steps you can take to improve your long-term financial security alongside taking out a protection policy.
What level of cover do you need?
Imagine your income were to stop due to accident or illness. How much would you need to receive to ensure your financial security? This can be as either a lump sum or ongoing payment.
There are different levels of cover to choose from. The greater the cover you want, the more you will pay in premiums.
Looking at how much of your income is essential for paying bills and the amount that’s needed to maintain your lifestyle is important here. You should also factor in other sources of income. For example, when you consider a partner’s earnings, you may find that you can opt for a lower level of cover and still have confidence in your financial security.
Whilst reducing the premiums is important, you need to ensure that the level of cover taken out will give you the protection needed.
How long do you need protection for?
As with the level of cover, the term of a protection policy can vary too. Again, you should think about your personal situation when you choose the term of the policy.
If being able to pay off your mortgage is your biggest concern, you may decide to select an option that’s linked to this. Alternatively, your biggest concern may be providing for your family and, as a result, the term may be affected by how old children are. With this in mind, it’s important to review your policy regularly, as your circumstances and needs may change.
Is there a deferment period?
This is an issue that’s most commonly associated with income protection policies. However, it is always worth checking if you would be affected by a deferment period.
This is the period between when you make a claim and when the policy will make the first pay-out.
Typically, the longer the deferment period is, the lower your premiums will be. However, you will need to ensure that you have other provisions you can fall back on during this period. This may be an emergency fund or sick pay from your employer.
Would joint cover suit your needs?
If both you and your partner could benefit from financial protection, joint cover may be an attractive option. It can be more cost-efficient. Also, be particularly useful if both of your incomes are essential for maintaining your lifestyle.
One key question to ask, if you are considering joint cover, is whether you would both benefit from the same type or level.
It’s worth checking what level of cover and the premium would be for an appropriate policy and comparing this to separate policies. The joint option won’t necessarily be cheaper. If one of you has a health issue, for example, you may find the additional penalty applied to joint cover means it isn’t the most cost-effective option.
Is the policy affordable?
Considering financial protection should be included in part of your financial plan. However, you also need to consider how affordable the premiums will be.
Taking out financial protection can improve your long-term financial security should something happen. But remember, it shouldn’t affect your financial security now.
There are many things that will affect how much your premiums are. This includes the type of policy you choose and the level of cover, as well as your personal health and whether or not you smoke. There are many different providers on the market to choose from and the way they calculate costs can vary significantly. As a result, shopping around is important.
If you have an existing condition, there may be specialist providers who can help you get the cover you want.
It’s important to look at protection policies in the wider context of your financial situation. This is an area we can help you with.
Reviewing your financial protection
Just as important as taking out the right kind of financial protection for your circumstances, is ensuring it remains appropriate.
Over time, your priorities and financial situation will change. In turn, will affect how well suited your existing policies are. We advise reviewing your financial protection on an annual basis as part of your financial plan. Also, after big life events, such as getting married, starting a family or following divorce.