The concept of insurance is not new to any of us. We insure our homes, cars and other valuable assets against accidents, loss or damage. In light of this, it is surprising that many of us fail to put in place adequate protection for ourselves and our loved ones should the unexpected happen. Protecting yourself and your family from the financial implications of illness, accident or death is something we should all consider.
The decision not to insure against various risks is alarming given that every two minutes someone in the UK is diagnosed with cancer, one in twenty nine children lose a parent before leaving education, and one in five people will be out of work for three months or more. Ask yourself: ‘how would my family cope financially if I or my partner could no longer contribute to the household income?’. Whilst the UK has a welfare system which provides a ‘safety net’, the level of financial support provided by the state is often overestimated. Indeed, the more affluent you are, the greater the potential fall in your income as a result of being unable to work.
With this in mind, insurance companies have developed protection contracts designed to cushion you and your family against the impact of unexpected circumstances such as sickness, accident or death. There are a wide range of products available, each serving a different purpose. Two key product areas of protection planning are:
Life Assurance Policies
There are many variations of Life Assurance available, however, the majority provide a cash sum payment to your dependants upon your death. In addition to providing financial stability, policies can also often be used as part of Inheritance Tax planning to cover any potential liability that may arise upon your own or your partner’s death.
Income Protection Policies
Income Protection policies provide you with a regular tax free income in the event that you are unable to work due to sickness or accident. These policies tend not to pay out in the event of unemployment. The income provided to you by a policy of this nature is based upon a percentage of your earnings, usually between 50% to 70% of your gross pay. The payments provided do not, however, suffer tax. The policies can be established to take into account the level of cover provided by your employer, if any.
A sensible starting point for the review of your protection needs is to draw up a list of the cover you currently have in place and engage a financial adviser in reviewing these policies. This will allow the adviser to determine whether your protection arrangements adequately meet your requirements. Remember:
- Check any protection arrangements that are provided to you by your employer. Your employment contract, handbook or personnel department will detail the benefits that you are entitled to.
- Check whether you have an insurance policy linked with your mortgage or other debts which covers you for death, accident, sickness or unemployment.
- Consider what savings you have which could be used instead of insurance. Whilst savings provide a welcome safety net, you should think very carefully about whether you want to rely on savings alone. The use of savings may mean that any other short term liability which might arise cannot be met effectively.
- Think about any additional expenditure that might arise if you or your partner were to fall ill or to pass away. Having sufficient cover in place to repay the mortgage can be a good first step, however, additional costs that may arise, such as for extra childcare, are often overlooked.
Once you have sought advice and established your protection arrangements, it is important to review your protection requirements regularly, particularly if your personal or professional circumstances should change. Revisiting your protection provisions will provide you with peace of mind that you and your family continue to be financially secure for whatever the future may bring.