What is protection and why do I need it?

09 November 2024

5 minutes

At a glance

• Protecting your family is often low on a busy to-do list, yet it’s a fundamental part of any family’s financial plan – and financial resilience.
• Financial protection such as insurance cover helps ensure that you and your family will be able to pay bills, maintain your lifestyle and safeguard your savings, should the worst happen.
• A financial adviser can help you make sure you have the right level and type of protection for you, both now and in the future.

We can all see the logic of protection. In fact, 2023 saw a record number of people taking out income protection policies according to the Association of British Insurers website.¹

We insure our cars, the contents of our homes, even our holidays and our pets almost as a matter of course. Would you feel comfortable travelling without medical insurance, or letting your car insurance lapse? But have you ever stopped to think about protecting what you value most – your family and your quality of life?

None of us know what’s round the corner. Yet many of us still cross our fingers, and trust that ‘the worst won’t happen to me’.

What types of protection should I be thinking about?

The rule of thumb is, if you value it – protect it.

Different types of protection insurance exist, depending on what, or whom, you need to protect, and for how long.

The three most widely available are Life Assurance, Income Protection and Critical Illness Protection.

Income protection pays a percentage of your income so you can continue to cover bills and outgoings, if you’re unable to work or lose an income unexpectedly.

Life insurance pays out a lump sum on death. The policy should be written in trust, to ensure the monies can be paid without probate and, so it won’t be liable to Inheritance Tax.

Critical Illness Cover pays out a lump sum if you suffer a specified illness such as a stroke, cancer or an event such as a heart attack.  

Protecting your income protects your family

Income protection is more than just a safety net, particularly if you’re one of the UK’s self-employed workforce. It protects your family and your way of life. When you’re self-employed, responsibility for your health and welfare, as well as your pension, passes to you, instead of being taken care of by your employer.

An Income Protection plan replaces a percentage of your income if you can’t earn, meaning you can continue to pay the bills, make mortgage repayments, and simply stay afloat. These policies should not just be viewed as protecting your standard of living but as insuring an income producing asset: you. Protecting yourself, your standard of living and your health can be far more valuable than protecting your material possessions.

The impact of losing an income can send shock waves through a family.

If you’re the main household earner, it can have a huge impact. Especially if you don’t have any of the cover or benefits that might come as standard if you work for an employer.

Often, the question isn’t whether or not to get protection, but whether you can afford to live without it.

Income Protection also means you’re protecting your longer-term savings and investments too. If you’re suddenly unable to earn, you wouldn’t need to raid your savings to pay the bills.

Am I properly insured? Your protection checklist

• Would your family be financially secure if you couldn’t work, suffered a serious illness or died?
• Do you have a ‘rainy day’ cash fund that you could live on for six months.
• Would you be able to afford to keep up payments for the family home if you or your partner lost your income?
• How would your children manage if they were unable to pay their mortgage? Would you be able to step in to help?
• Would you have to cut back or dip into savings to keep afloat?

What do Life Assurance and Life Insurance policies cover?

Life Assurance – sometimes used interchangeably with Life Insurance – pays out a tax-free lump sum on death. So you know that your family will be well provided for if the worst should happen. Life Assurance policies can also be useful if you’re expecting to pay Inheritance Tax and want to make sure your family can cover it. If the Life Assurance policy is written in trust, the pay-out sits outside your estate, so it won’t be counted in an Inheritance Tax assessment but could help cover the bill.

Life Insurance covers you for a fixed term, not the whole of your life. These fixed term protection policies are useful when covering a financial commitment that will reduce or end in the future, such as a mortgage, or school fees.

Do I need Critical Illness Cover?

All protection cover is about de-risking your financial situation and that of your family – so it’s always a personal choice as much as it is a prudent one. Critical Illness Cover plans provide a lump sum if you’re diagnosed with one of a large number of specified illnesses. The cover can be for a specific time period or for your whole life. Given that we are all living longer, a critical illness policy, whether the monies are used to assist with recovery or simply times and options, may be one of the most important for your future financial resilience.

Protecting others in the family

You may consider helping other family members. Although you can not take out a policy on your children. It may make sense to help them financially afford protection for themselves. Helping with family member’s, perhaps on low incomes, with insurance often pays for itself in terms of your peace of mind.

What could happen if I don’t get protection?

Many people who needed time off work due to illness or mental health events said they’d need fall back on savings to get them through their convalescence period, adding additional stress at a difficult time.

The recommended amount of savings for an emergency fund is three to six months’ expenditure. And that can act as a buffer between jobs or see you through higher living costs, But you can’t rely on it for a long period of time.

It can take years to build up those emergency funds, but a matter of days or weeks to deplete them. In some cases, one household crisis could empty out the rainy-day fund entirely.

Why protection matters

Taking out life assurance or critical illness protection could be the most far-sighted and potentially life-changing pieces of financial planning you’ll ever do.

If you should need it, it’s absolutely invaluable.

If you’ve got a question about protecting you or your family, do get in touch with us.  

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority

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