When should you consider financial protection products?

7th August 2019

Financial protection probably isn’t something you often think about, but it should be part of your financial plan. What would happen if your income were to unexpectedly stop for a period of six months for example? Many people dismiss financial protection as something that isn’t suitable for their situation. However, if losing your main source of income would have an impact on your lifestyle, it’s worth looking at your options.

According to research from Canada Life:

  • Just 17% of people believe in the value of group income protection provided through their employer
  • Only 13% see the benefit of critical illness cover being offered as a work benefit

Of course, some of those failing to see the benefit of group cover may have taken out personal protection products. However, given that past figures have indicated that 81% of UK homeowners don’t have any form of protection, this seems unlikely.

Financial protection is often triggered by life milestones

The above findings indicate there’s a lack of awareness around how financial protection can enhance security and provide peace of mind. According to a Royal London report, it’s often significant life milestones that trigger the decision to look into how these products can form part of a financial plan. Buying a house or starting a family are recognised as the biggest triggers for taking out protection, followed by a salary increase. However, these milestones are often happening later in life.

So, if you’ve not ticked off the traditional milestones, does that mean you don’t need any form of financial protection? In many cases, it can still be valuable.

Jennifer Gilchrist, Protection Specialist at Royal London, said: “Traditional triggers such as buying a house are happening at a much later stage for people, but younger consumers still need protection such as income protection. The research shows there’s an opportunity for advisers to have protection conversations with younger clients to help them get the right cover for their needs.”

For example, you might not own your home and be paying off a mortgage, but if that’s the case, you’re likely paying rent. Falling into arrears with rent can be just as devastating and stressful as missing mortgage payments. Unexpectedly losing your income can have a long-term impact on your lifestyle and wellbeing if you don’t have a back-up plan in place. As people are often not purchasing their first home until they’re in their thirties, it’s important to start thinking about financial protection before this milestone occurs.

It’s a similar issue with waiting until you start a family. Having a child often means parents think about how their family would cope if their income were to stop or they passed away. However, losing the income of the breadwinner may have just as big of an impact on your partner and other loved ones even if children aren’t involved. Taking out some financial protection can give you peace of mind about your security and theirs.

Do I need financial protection?

When assessing whether or not you need financial protection, you should focus on your ability to pay for at least the essential outgoings should your income stop, rather than life milestones. If your income were to stop, how long could you cope financially? It’s an answer that’s tied to two factors:

  • Savings: As a general rule of thumb, it’s advised that you have between three and six months of expenditure accessible to cover financial shocks, including being unable to work. This provides you with a financial safety net. As well an emergency fund you may have other savings and investments that you could dip into should your income stop for an extended period of time.
  • Sick pay policy: You should also consider whether you’d receive any pay if you were unable to work due to illness or injury. Statutory Sick Pay is just £94.25 per week for up to 28 weeks and is unlikely to cover the basic costs of living for many families. However, your employer may offer an enhanced sick pay policy that will provide a greater level of financial security.

Remember, it’s not just the bills you pay out that should be considered, but where costs may rise if you were to become ill. For example, you may not be the breadwinner in your family, but are the main carer for children. Should you become too ill to continue looking after children as you do now, you may find that childcare costs rise significantly, placing pressure on your finances.

If with the above two factors considered you think you’d struggle if income were to stop, taking out an appropriate financial protection product could provide you with peace of mind. If you have any questions about financial protection products or want to understand which policies may be right for you, please get in touch.

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