Financial protection could provide you with a cash boost when you need it most, and there’s more than one type to consider.
Last month, you read why financial protection provides a crucial safety net should you face an unexpected shock. Now, read on to find out more about some of the key options.
2 forms of financial protection that could plug an income gap
Your income suddenly stopping is likely to have an immediate effect on your short-term finances. In addition, it may harm your long-term plans too. For example, you might halt pension contributions or dip into a savings account you’d earmarked for another goal.
If an illness or accident means you can’t work, two types of financial protection could be valuable.
1. Income protection
Income protection would pay you a regular income if you were unable to work due to an accident or illness. The income it provides would continue until you return to work, retire, or the term ends.
So, if you can’t work, it could take a weight off your mind and allow you to focus on recovering.
Usually, income protection would pay a proportion of your usual salary, such as 60%. According to figures published in September 2024 by the Association of British Insurers (ABI), in 2023, more than £177 million was claimed through individual income protection. The average successful claimant received £22,270.
2. Critical illness cover
Critical illness cover would pay out a lump sum if you’re diagnosed with a covered critical illness. This cash injection might allow you to take an extended period off work while remaining financially secure.
The ABI figures show the average person who made a successful critical illness claim in 2023 benefited from a £68,354 lump sum.
You should note that critical illness cover will not pay out for every diagnosis. It’s important to check how comprehensive your cover would be and understand what would be excluded.
You can combine types of financial protection
As income protection and critical illness cover pay out in different circumstances, it may be beneficial to consider whether both options could be right for you.
2 types of financial protection that could support your family if you pass away
Thinking about passing away is difficult, especially if you have dependants. Yet, taking steps to ensure their financial security could make a huge difference in their life should the worst happen.
Here are two types of protection that could improve the financial security of your family.
1. Life insurance
Life insurance would pay out a lump sum to your beneficiaries if you pass away during the term. The money can be used however your beneficiary chooses, such as reducing debt, paying school fees, or covering household bills.
However, according to a Which? report, 39% of parents don’t have life insurance. This oversight could potentially leave your family in a vulnerable position if they rely on your income.
When assessing whether life insurance could be appropriate for your family, you might want to consider how their lifestyle would change if you passed away. For example, if you’re the primary caregiver to young children, would your partner need to reduce their working hours? If so, life insurance may enable them to do so without worrying about money.
On average, ABI figures show life insurance paid out £80,403 in 2023.
2. Family income benefit
If your loved ones may struggle to manage a lump sum or they would prefer a regular income they can rely on, family income benefit might be more suited to your needs.
Rather than a one-off payment, family income benefit would pay out a regular amount for a defined period if you passed away during the term. You might choose for the income to continue for a set number of years or tie it to a milestone, such as when your youngest child turns 18.
You can take out both life insurance and family income benefit
Again, depending on your family’s circumstances, you might choose to take out both life insurance and family income benefit. This combination could provide your loved ones with an immediate cash injection and a long-term income stream.
For instance, you may choose to take out life insurance to pay off debts, such as your mortgage. Then, family income benefit could provide enough to pay for day-to-day expenses until your children reach adulthood.
Get in touch to talk about creating a financial safety net
As part of a wider financial plan, we could help you create a financial safety net that considers your needs and concerns. Please get in touch to arrange a meeting with our team.
Next month, discover what you might consider when calculating the level of cover you need when taking out appropriate financial protection.
Please note:
This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
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.