The pandemic has highlighted the impact the unexpected can have on finances and lifestyle for millions of people. The uncertainty of the last year is spurring more people to consider financial protection products. However, simply taking out a protection policy may not provide you with the right type or level of cover. It’s crucial you consider your priorities and situation.
Some 8.3 million (48%) of 25- to 44-year-olds that don’t have an income protection policy are now interested in learning more, according to an LV= survey. After a year when unemployment figures increased and more than nine million people have been on furlough at some point, workers are more aware of their financial security than ever.
Income protection policies pay out a regular income if an employee is unable to work due to an accident or illness. This type of policy can provide financial security if you need to unexpectedly take time off work.
Among 25- to 44-year-olds, life insurance is also being considered. Four in ten that don’t have existing cover are now considering taking out a life insurance policy to protect their families.
Financial protection can provide peace of mind and create financial security. However, choosing the right type of protection for you is crucial. Answering these five questions can help you understand which policy matches your needs.
1. What are your priorities?
Why are you thinking about taking out an insurance policy? Do you want to ensure you’d receive a regular income if you become ill, or are you worried about what would happen to your family if you passed away?
Focusing on what your concerns are, and then choosing the right financial protection can provide peace of mind. Different policies will pay out under different circumstances and you may find you’d benefit from more than one type of financial protection. There are three main types:
- Income protection provides a regular income if you’re unable to work due to an accident or illness.
- Critical illness cover pays out a lump sum on the diagnosis of certain illnesses named within the policy.
- Life insurance pays a lump sum to your loved ones if you pass away during the term of the policy.
All three can provide you with financial support when you need it most, but pay out under different circumstances. Thinking about how you’d cope financially under these circumstances can help you see if a policy would be beneficial to you.
2. Do you have any existing cover?
Before you start looking at new policies, take some time to review what you already have in place. Conducting a full review can help you see where there are gaps.
Your employer may offer some benefits that mean you don’t need to take out additional insurance. A “death in service” benefit may mean life insurance isn’t necessary, for example, or a comprehensive sick pay policy may change the terms of an income protection policy to suit you.
It’s also worth reviewing other products you may have that could have additional benefits. Some bank accounts, for instance, will come with an insurance policy.
3. What’s the size of your emergency fund?
An emergency fund can provide a short-term safety net when you need it. But it will also affect the insurance policy that’s right for you. An income protection policy, for example, will have a deferred period before it starts paying out. The longer this period is, the lower your premiums will be, but you need to ensure you’ll have financial security during this time.
Ideally, you should have between three and six months of outgoings saved in an emergency fund.
4. What level of cover do you need?
There’s no one-size-fits-all level of cover. You should take some time to think about what you or your family would need to pay for if something unexpected happens. Choosing the right level of cover is important: too little cover could mean you face financial hardship, while too much could mean you pay higher premiums than necessary.
Assess what your regular outgoings are now and consider what would change if something were to happen. Would you need to adapt your home if you were diagnosed with a long-term illness? Would your childcare costs increase if you or your partner passed away?
5. How long do you need the policy to last?
Finally, how long will you need the insurance policy to be in place? There’s little point in an income protection policy that lasts five years if you plan to retire in two. Many families also link their life insurance policy to the age of their children or when the mortgage will be paid off.
Thinking about your life plans when taking out insurance can ensure you choose a policy that will provide security where it’s needed most.
If you’re unsure which type of insurance policy would suit you or want help to find the right deal for your circumstances, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.