Most financial plans are built around an expectation that your income will continue. But life is nothing if not unpredictable. Sometimes it brings unexpected blessings, and other times it can send unforeseen problems out of leftfield.
A sudden health issue could affect your day-to-day finances and have a knock-on effect on your long-term financial plan.
However, having protection in place could add a layer of reassurance that, if the unexpected happens, you can keep your finances on course. There are plenty of options out there, but two key types of protection to consider are critical illness cover and income protection.
Read on to find out how these types of cover could help to add resilience to your financial plan.
Protection can alleviate everyday financial burdens, as well as preserve your financial strategy
Research from the latest Scottish Widows retirement report shows 3 in 10 people have seen their work impacted by their physical or mental health over the past five years.
If you are in poor health and can’t work, you could be forced to:
- Use savings earlier than you’d planned
- Cash in investments
- Put long-term plans such as retirement on hold.
Having income protection or critical illness cover in place could offer you some peace of mind that if you do find your work, and therefore income, is affected by illness, your financial strategy will be largely unaffected.
According to LV’s Reaching Resilience report looked at how employees would feel if a serious illness meant they couldn’t work for two months or more. Half of respondents said insurance that protects their monthly outgoings or pays out a lump sum would make them feel more financially resilient.
Income protection – a regular income
Income protection is designed to provide a regular income if illness or injury prevents you from working. The amount you can insure is usually a proportion of your earnings, rather than your full salary.
For example, a policy might pay 55% of the first £50,000 of earnings and 35% of earnings above that.
Someone earning £125,000 a year could receive a potential benefit of £53,750 a year, subject to the terms of the policy.
Critical illness cover – a one-off payment
Critical illness cover usually pays out a lump sum if you are diagnosed with one of the multiple specific illnesses covered by the policy.
There are generally two options for cover:
Level cover
Here, you choose how long you want the cover to run for and what lump sum would be suitable for you. You then usually pay a set monthly amount for the cover term. A further benefit could be to have the cover amount increase in line with inflation.
Decreasing cover
The value of this cover goes down each month, but your premiums stay the same for the duration and can be lower than level cover. This can be useful if you have decreasing debts to pay monthly, such as a mortgage, and could mean you don’t need to dip into your savings or cash in investments.
While they are both designed to support you while you can’t work, income protection cover is about maintaining cash flow, while critical illness cover can help to relieve immediate financial pressures.
Protecting your income can help keep you on track with your financial goals
When we create your financial plan, your savings and investments are usually designed to serve a particular purpose.
For example, this could be:
- Creating an emergency fund
- Buying a second property
- Funding your retirement
- Paying for children’s or grandchildren’s education.
In many cases, your plan will cover all or a combination of these, as well as any specific other financial goals you may have.
This means that drawing on your savings and investments if your income has stopped could result in having to rethink these plans and their timing.
Your investments, in particular, are designed for your long-term financial future. If your income suddenly stops and you need to draw on them, you could find you have to sell at a time when markets have fallen, meaning you’re not getting an optimum price.
Get in touch
A truly resilient financial plan isn’t just about growing your wealth and planning your retirement. It is also about considering a range of scenarios which could potentially disrupt your plan and putting safeguards in place to protect your long-term financial security.
The right cover will depend on your personal circumstances; we can help you to establish if income protection is a priority, or if critical illness cover may also be a valuable addition to your package of protection.
Please get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Note that financial protection plans typically have no cash-in-value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.