Can You Ever Have Too Much Financial Protection?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham.
All of us want our wealth and finances to be protected from harm, as much as possible. Yet the term “financial protection” can encompass quite a lot of diverse, often-interrelated topics. For instance, it could refer to the guarantees provided by the Financial Services Compensation Scheme (FSCS) which compensates your bank savings up to £85,000 in 2019-20. Financial protection could also refer to state support which you might be entitled to (e.g. Jobseekers Allowance if made redundant), or certain employment benefits (e.g. sick pay).
More commonly, however, financial planners like ourselves talk about financial protection more broadly to include measures such as income protection, critical illness cover, private medical insurance and life assurance. Collectively, these financial instruments are designed to provide financial support or income to you and your family if the worst happens. For instance:
- A critical illness cover (CIC) policy can provide a lump sum payment if you suddenly find yourself unable to work after being diagnosed with a defined illness.
- Income protection policy can replace some of your lost salary if you can no longer work due to debilitating illness or injury.
- Life assurance can provide a guaranteed lump sum payment to your loved ones upon your death. (Term insurance would only pay out if you die within an agreed timeframe).
Of course, many of us would see merit is having all three of these options in place. Yet it’s important to remember that good financial planning isn’t about jumping on every available financial product on offer. Rather, it’s about smart and strategic planning to move you towards a specific set of goals.
In other words, for certain people, it might be appropriate to have multiple, more comprehensive protection policies in place compared to others. A range of factors might influence your financial planner’s recommendations about this, such as your liabilities and current life stage.
Where greater protection can help
There are certain areas of personal finance where most people would benefit from at least some financial protection. For instance, it is estimated that nearly 80% of British homeowners do not possess any income protection to cover their expenditure if they were to fall seriously ill. Over 70%, moreover, have no critical illness cover (CIC) either to provide a much-needed lump sum in the same kind of situation. However, it is not just mortgage-holders who need to consider their financial position. Many renters would also need to continue covering the costs of their tenancy if they suddenly became diagnosed with a serious illness, yet also have no protection in place.
A common reason given for not considering financial protection is the cost. Many people think it is simply too expensive. Yet, with the help of an experienced independent (whole of market) financial adviser, it is often possible to find a good deal. In some cases, you might only be looking at £20-30 per month, which isn’t very expensive considering how much many of us spend on digital subscriptions, mobile apps and other luxuries. It’s also important to remember that you do not necessarily need to go with the protection option(s) offered by your finance provider. There might be better deals elsewhere, which your financial adviser can help you to find.
Where protection can be less necessary
Financial protection often comes into people’s minds during two important life events: getting a mortgage, and having children. This is understandable; the former is a huge liability, whilst the latter means you now are responsible for people who are financially-dependent on you. Yet it’s important not to rush into signing up for any policies which might not cover all of your needs, which are perhaps unnecessary or which are more expensive than other options.
One important area to consider with your financial adviser is your employee benefits. Many people are unaware, for instance, that their employer offers staff a generous critical illness cover package which covers many of their requirements. Others offer private medical insurance, and these can often come at a lower cost compared to getting a policy on your own.
Your age and stage of life are also crucial factors to weigh up with your financial adviser. For many retired people, for instance, their income is largely covered by their pension income. Their income does not depend on their capacity to go out and earn a living, so income protection for many over 65s is unnecessary. However, a life insurance/assurance policy might be a sensible option to consider if you potentially face a large inheritance tax bill upon your death. Taking out a good policy and writing it into an appropriate trust with your financial adviser can sometimes save you inheritance tax than if it were to pay out to your estate and thereby inflate its value. In other cases, however, it might make more sense to simply have it paid to your estate.
For new or upcoming parents, a term life insurance policy might be a sensible option to consider with your financial adviser. This might apply until your children have grown up and become financially independent, allowing them to access a vital lump sum if your death meant that your surviving family would lose the income you previously contributed to the household.
Financial protection can often be a morbid topic, but it is very important to consider; especially if you are financially-responsible for dependents. The world of protection can be highly complex, however, and it can be difficult to know which types of protection best suit your needs, and where the best deals can be found. A reputable independent financial adviser can help you with this.
If you are interested in discussing your own financial plans and protection policies with us, please get in touch to arrange a no-commitment financial consultation at our expense: