July 7, 2024
When you’re considering any financial decisions, from your next mortgage to your long-term financial plan, and whatever your stage in life, you want to be confident that, should something unexpected happen, your finances are protected, both now and in the future.
When we’re talking about financial protection, people often think first about insurance – protecting their income if they are unable to work, and ensuring that they can meet financial commitments from mortgage payments to everyday living expenses.
Working with an experienced IFA will ensure that you have the right protection in place, based on your circumstances, financial commitments and long-term goals.
One aspect that many people don’t consider, though, is that their financial protection needs to be reviewed as their circumstances change, and how it fits into their overall financial strategy.
At Talis IFA, we recommend that your protection is reviewed regularly, as part of a holistic financial review and planning process, to ensure that you have the cover you need, and that any cover you do have remains relevant. That way, you can be confident both that the premiums you are paying are worth the outlay, and that you and your family are insulated against financial risk in the event of a sudden reduction in your income.
Financial protection from the unexpected
If you’ve ever had a mortgage, or taken out a loan, you’ll probably have had a conversation at some point about insurance cover to make sure that, should you be unable to work, or lose your job, you’ll still be able to cover your repayment commitments.
Many people also hold the belief that insurance policies are expensive, or not worth it. But the reality is that, whilst it is true that you need to pick the most appropriate policy for your needs, most insurance companies have a very high (over 90%) pay out rate in the event of claims, and the vast majority of claims that are rejected are due to the customer having withheld, or given incorrect, information.
An in-depth discussion about your personal circumstances, health and financial commitments will allow your IFA to search the whole of the market to find the most cost-effective policies for you.
Here is an overview of a few of the most common.
Income protection insurance policies
Income protection is designed to provide you with a reliable income should you not be able to work due to illness or an accident.
It will pay out a percentage of your regular salary each month. You can work out, with your IFA, how much of your salary will be essential to keep you going.
Income protection insurance usually begins to pay out after a deferment period, which varies from weeks to months depending on the product you choose. So you will also need to ensure you have an emergency fund, or other sources of income, during the deferment period.
Income protection policies will continue to pay out until you’re able to return to work, you retire or the policy term ends. The premiums will vary depending on the percentage of your salary you need to cover, the deferment period, and the term.
Your IFA will help you to work out the most appropriate options for you.
Mortgage protection insurance
Also called mortgage payment protection insurance (MPPI), this is a type of policy specifically designed to pay your monthly mortgage payments if you can’t work because of illness or injury, or due to redundancy.
After a deferment period, usually at least 30 days, but sometimes up to 180 days, your insurer will pay a set amount each month to cover your mortgage payments. You can also specify cover up to around 125% of your mortgage, to cover your household bills.
As with any of these cover options, your policy premiums will depend on the amount you’re insuring, the deferment period, and the payment period. Most mortgage protection policies pay out for up to 12 months, or until you return to work, depending on the specific terms you opt for.
Critical illness cover
Unlike income protection insurance, critical illness cover can provide a lump sum if you are diagnosed with any condition specified in the policy conditions. You might be too ill to return to work or it might just be a temporary absence while you recuperate.
The lump sum payment (also known as the sum assured) can be used however you wish, from paying essential outgoings to adapting your home if necessary.
It’s also important to be aware that critical illness cover won’t pay out in all circumstances. The illness must be one that is covered by your policy. This will depend on individual providers and policies.
Life assurance
If you have dependents, it might be worth considering a life assurance policy, which will pay a lump sum on your death and provide financial security for loved ones during a difficult time.
Life assurance payments can be used however your dependents wish – to pay the mortgage, meet school fees, as retirement income or to provide the financial security to take time away from work if needed.
It is also possible to take out a life assurance policy to cover potential inheritance tax (IHT) liabilities.
Choosing financial protection products
With so many options to choose from, you’d be forgiven for feeling confused. That’s just one of the reasons why it’s a good idea to consult an IFA, rather than take out a policy that you’ve seen advertised, or because your bank/mortgage provider etc. pushes it at you.
To make sure you’re getting value for money, and have the most beneficial protection in place, your IFA will look holistically at your circumstances, financial commitments and dependents. Then they’ll advise you on the options that best meet your needs.
They’ll consider:
The first step is to review what, if any, cover you already have. This could be a policy you’ve taken out in the past or something offered through your employer. Your IFA will ensure that any further policies will complement existing ones to ensure you’re getting best value for money.
The deferral period is important. The longer it is, the lower the premiums will be. But you need to weigh this against the amount of sick pay your employer offers, how long sick pay would last, and what other financial safety net you have available to you to avoid a shortfall.
This will involve looking at your lifestyle and goals and balancing your financial needs against premiums. If you choose critical illness cover, what lump sum would provide you with peace of mind? How much regular income do you need to meet essential outgoings? The higher the amount of cover, the more your premiums will be.
Premiums for financial protection are often lower than clients expect. But it is important to remember that the exact cost will depend on several factors. This will include the level of cover, deferment period and payment term, as well as your health and lifestyle. It’s important to be completely honest about the latter two, as the main reason for insurers refusing claims is when information has been withheld.
At Talis IFA, we recommend regular financial reviews, and to consider financial protection as an integral part of your financial plan. We’ll look together at your current circumstances and future goals, and recommend the solutions which best meet your needs. We’re transparent about our fees upfront – giving you confidence that our recommendations are objective and based on your best interests.
We pride ourselves on offering straight-talking advice in plain English – helping you to navigate the financial world with greater confidence.
To get our help to protect your financial future, find an IFA here.
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