What’s financial protection and do I need it?

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Have you ever thought about how your family would cope if you died or were too ill to work? If you haven’t, then you’re not alone. Our recent survey¹ found only 32% of respondents had life insurance and just 12% had critical illness cover, despite protection products such as these offering a vital financial lifeline in the event of death or illness.

Do I need financial protection?

Death and illness are horrible subjects to think about, but there’s no getting away from the fact they do happen. Life is unpredictable, and even the savviest of savers could find their plans are scuppered by events outside their control.

If you died, could your family continue to pay the mortgage while still enjoying the lifestyle they’ve become accustomed to? And if you were unable to work due to illness, how long could you keep paying the bills without dipping into your hard-earned savings?

Taking out financial protection helps to ensure your family’s finances are taken care of, during what is an already upsetting and stressful time. It’s also a way of protecting the journey towards meeting your financial goals.

View our guide on protecting your financial security

Which products are right for me?

The protection products that are right for you depend on your individual circumstances, including whether you have a mortgage or rent, and whether you have financial dependants, such as a partner and / or children. A financial adviser can recommend the policies that suit your needs but, in the meantime, these are the main ones to consider:

1. Life insurance

Life insurance pays out a lump sum if you pass away. There are different types of cover to choose from, but the most common one for those looking to protect a mortgage is ‘decreasing term’ life insurance. The sum assured (the amount the policy will pay out) reduces over time, typically in line with the way a repayment mortgage reduces. There is also ‘level term’ life insurance, where the sum assured remains the same throughout the policy.

When it comes to how long your policy lasts, there are two types of life insurance: whole of life and term life cover. A whole of life policy continues until you die, so a payout is guaranteed, while a term policy is for a specific period of time, and pays out if you die during that period.

Life insurance should be considered by anyone who has an outstanding mortgage and / or financial dependants. As well as paying off the mortgage, the lump sum could provide an additional cash buffer to ensure your family’s financial security.

2. Family income benefit

Family income benefit also pays out on death. However, instead of providing a lump sum, it pays out a regular income from when you die until the end of the policy. For example, if you took out a 20-year policy and died after 15 years, it would pay out for five years.

As its name suggests, family income benefit is aimed at families who want to provide their surviving partner with an income for a set period of time. It could help pay for school fees and other activities, as well as essential bills.

3. Critical illness cover

Critical illness cover provides you with a lump sum if you’re diagnosed with one of the critical illnesses covered by the policy. The lump sum could be used to help pay off the mortgage or other debts, or adapt living arrangements to your new circumstances.

Critical illness policies vary enormously from one provider to the other, both in terms of the types and severity of illnesses covered, and whether they offer premiums that stay the same throughout the policy (‘guaranteed’) or which can increase over time (‘reviewable’).

If you don’t think your savings would cover you if you became seriously ill, critical illness cover could be well worth considering.

4. Income protection

Income protection pays out a regular income if you’re unable to work because of an accident or illness, including a mental illness like depression. You can choose when you want the payout to start – in general, the longer the deferred period, the lower your premiums will be. You can also choose between short-term cover, which might pay income over one to two years, or long-term cover, which typically runs until retirement or when the policy ends (whichever is sooner).

If you’re self-employed or your employer only provides statutory sick pay, income protection could prove especially valuable.

Next steps

It isn’t always easy to know which protection products and amount of cover you need. Getting some financial advice will help you make the right decisions, so you can rest assured your family will be protected whatever life throws at you. For smart advice that’s tailored to your circumstances, why not speak to one of our financial advisers today?

¹ Survey by Find Out Now, 1,000 respondents, November 2021

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The value of investments, and any income from them, can fall and you may get back less than you invested. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.