Protection Planning and COVID-19 – A Short Guide
Nothing could have prepared us for the scale of COVID-19, either in terms of the world economy or the personal impacts felt by all of us.
But there is nothing like a pandemic to raise questions over our own mortality and our families’ security. Tragedy and hardship, while not always avoidable, can be planned for and contingencies put in place.
Risk management is one of the core elements of a financial plan.
So how can you ensure that your family is protected if the worst should happen?
Build an Emergency Fund
There are many reasons why an emergency fund is a top priority, for example:
- It means that you will have readily accessible cash in the event of an emergency.
- It avoids the need to withdraw cash early from investments, or rely on debt.
- Problems such as malfunctioning household appliances or major repair bills become a mild inconvenience rather than a major worry.
- A cash buffer can give you some breathing space if you lose your job or are unable to work for health reasons.
An emergency fund should comfortably cover at least three to six months’ worth of household expenditure.
It’s easy to see why maintaining an emergency fund is a good idea during a pandemic. Of course, not everyone has the resources available to build up this level of cash. But even small amounts are worth saving, and if any space can be found within your budget, creating an emergency fund should take top priority.
Keeping debt under control is step two in ensuring your family is well-protected.
Some debts are necessary and not subject to high interest rates. A mortgage, for example, should be low on the list of priorities for repayment, particularly as this is usually a large amount, repaid over a long period of time – small overpayments are unlikely to make a big difference and the money could probably be put to better use elsewhere.
More expensive debts, such as credit cards and loans, should be repaid as soon as possible. By repaying smaller debts first, you will have more money in the monthly budget to tackle larger debts or invest for the future.
Reducing debt also reduces the household’s expenditure. This means being less vulnerable in the event of poor health or a loss of income.
A life insurance policy pays out a lump sum in the event of death. It can cover one person or a couple, and the term can be anything from a few years to the rest of your life. The premiums must be maintained for as long as the cover is in force.
No one wants to think about needing life insurance. But if you are in good health now, it will be cheap and easy to set up, and can spare your family significant hardship if the worst should happen.
The pandemic should not suggest that you are more at risk than you were before, particularly if you do not have any underlying health conditions. We take risks every day, at home, at work and in the car. But there are some reasons to prioritise life insurance in view of the pandemic:
- If you are in good health, it is unlikely that life insurance will ever be cheaper than it is now, as premiums tend to rise with age.
- As insurers pay out more in the wake of the pandemic, this may lead to higher prices or wider exclusions.
- You might contract the virus in the future, which could make it more difficult to obtain insurance, particularly if you develop chronic symptoms.
- Between the health implications and the economic outlook, families may find that they struggle more than usual. This can make the loss of a breadwinner even more devastating.
Critical illness cover pays out a lump sum if you are diagnosed with a serious illness. The conditions covered are stated by the insurer, along with levels of severity. If an illness is not mentioned in the policy terms, it is not covered.
Many of the same reasons mentioned above in respect of life insurance can also be applied to critical illness cover. While it will not pay out due to a diagnosis of COVID-19 (unless complications resulted in one of the conditions covered), it can help ease financial hardship for individuals and families at an already difficult time.
It is also worth noting that at the height of the pandemic, the NHS closed all but the absolutely essential services, and have not yet resumed at full capacity. This could lead to conditions not being picked up as quickly, or treatment being delayed. A critical illness payout could open up other options, for example paying for treatment privately.
Income protection cover is designed to pay out a regular sum if you are unable to work due to illness or disability. This will normally start after an initial deferred period of between one month and one year (which is one of the reasons we recommend an emergency fund) and depending on the term of the plan, can continue up until your retirement age.
Income protection is an ideal complement to critical illness cover, as it can cover conditions which are not within the critical illness policy terms if they persist for the longer term.
We don’t yet know the long-term implications of COVID-19. Some otherwise healthy people contracted the disease at an early stage and are still having debilitating symptoms.
While this is an unlikely outcome for most people, it will factor into insurers’ pricing and underwriting decisions.
If you are healthy and have not had the disease as far as you know, it may be worth arranging income protection and securing your premium now. This can help your family build a secure future even against the inevitable challenges of the pandemic.
Please do not hesitate to contact a member of the team to find out more about your protection options.