Money Means guides are brought to you by FSCS, the people who protect your money from £1 up to £85,000 in UK banks, building societies and credit unions. Find out more.
When it comes to your insurance policies, the good news is that the Financial Services Compensation Scheme (FSCS) protects insurance policies and will be there for you if your insurer goes into liquidation. It provides comprehensive protection for people.
Protection is one area of our finances it’s easy to forget about, yet it’s essential to have a safety net in place to ensure you can support loved ones financially should the unexpected happen.
After all, there’s never any knowing what surprises life might throw at you. Having insurance can be very important.
Fail to put this cover in place, and you may not be able to meet all your financial commitments – such as bills and the mortgage – in the event of serious illness, or even death. This could put your nearest and dearest at risk of financial hardship.
Protection not viewed as a necessity
Many people do not view protection insurance as a necessity, with some not rating this cover as a priority, and others believing it is a waste of money. There are also a lot of concerns about the potential expense.
At the same time, some individuals wrongly assume that their employer will provide them with a financial safety net – or that the State will adequately support them against sickness and incapacity. But financial support from the State is limited, and only some employers will lend a helping hand.
To make matters worse, the fact that PPI (payment protection insurance) has made the headlines over and over again – for all the wrong reasons – has led to some people tarring all protection products with the same brush. But the fact is, certain protection policies are vital – and the good news is, premiums don’t have to cost the earth.
Types of cover
Life insurance, critical illness cover and income protection can all provide important financial support in times of need, helping to cushion dips in finances should your family be hit with a setback.
Each of these products offers a different type of cover, and prices will vary according to personal factors, such as the amount of cover you want, your age, your job, how healthy you are, and whether you smoke.
Despite protection insurance being essential, worrying findings in a recent study by insurer, Royal London, reveal that while a quarter of UK adults have a life insurance policy, only 6 per cent have critical illness (CI) cover and 4 per cent have income protection insurance.
If you don’t have any cover in place, now could be a good time to take action and build a financial safety net to reduce money worries.
Life insurance cover is a “must-have” if you have a partner or children who depend on you. This will ensure the mortgage and bills get paid should you die prematurely.
Your main focus should be on getting enough life insurance to cover your debts, pay the bills, and to maintain your standard of living.
A straightforward option may be a term insurance policy which pays out if you death occurs within a fixed period – often matched to the term of an interest-only mortgage.
A cheaper alternative is decreasing term policy – usually sold with a repayment mortgage – where the amount that will be paid out in the event of death goes down over time, broadly in line with the mortgage debt.
Critical illness (CI) cover
If you develop a serious health condition – such as cancer, heart attack, or stroke – CI cover pays out a tax-free lump sum.
It offers a financial buffer at a stressful time, and is often bought alongside life insurance when taking out a mortgage.
Once again, you should look to take out enough cover for your debts, mortgage and monthly bills. However, as CI cover is a lot more expensive than life cover, it may be a case of seeing how much you can afford.
If you are unable to work due to illness or injury, income protection will pay out a regular income.
Generally speaking, it starts six months after an absence, and continues to pay out over a long period of time until you are fit enough to return to work or reach retirement age.
The amount you take out is usually based on your salary.
When thinking about income protection, it’s important to look for a policy that will pay benefit if you cannot carry out your “own occupation” – rather than “any job” – as this should improve your chances of making a successful claim.
Benefit A cheaper protection alternative is a Family Income Benefit policy. This pays out a series of smaller regular amounts that can be used as income – rather than one lump sum. The policy term is often timed to cover the period children are at school.
Tips when taking out protection insurance protection should be part of your financial planning, no matter what stage of life you are at. But life events, such as buying a house, getting married, or having children should also serve as a reminder to revisit your protection needs.
In an ideal world, anyone with debts and dependants should look to protect their families with life insurance, CI cover and income protection. But if costs mean you can only afford one, income protection may be the most useful because it replaces the one thing that pays for everything else.
Before purchasing any policy, you should check what cover you have in place at work.
This will ensure you avoid doubling up on cover offered by your employer. For example, some people may get a free “death in service” benefit which pays a tax-free lump sum to the families of those who die while working for their employer. This is usually a multiple of four times salary. However, you need to be aware that this cover stops as soon as you leave an employer.
Make sure you shop around to find the best cover for your circumstances at the best price. But be wary of super-cheap policies you find on price comparison websites, as these may be riddled with catches, and may not provide the cover you need. *a better option may be to seek advice from a specialist broker, such as Lifesearch (Lifesearch.co.uk) or London & Country (Landc.co.uk). You can also find an adviser specialising in protection at Unbiased.co.uk and Vouchedfor.co.uk.
Bear in mind that giving up smoking can cut protection insurance costs significantly – potentially halving your premiums once you have given up for more than a year
The Money Advice Service provides lots of useful information about insurance if you want to find out more.