Having protection in place is an important part of your financial plan. Here’s why
24/05/2023When you’re making plans for your money, the first elements that people often consider are their savings and investments. But actually, it’s often prudent to consider your protection cover first, so that you and your money are guarded against the unexpected.
Yet concerningly, amid the cost of living crisis gripping the UK, many people have looked to their protection as an area to reduce their spending.
In fact, according to Insurance Times, 7% of insurance customers cut back on their cover in the latter three months of 2022. Of these individuals, 43% actually cancelled their policies entirely.
This means that many people may now be in a precarious position, should something happen that means they would have needed to rely on their cover.
So, find out why having protection is a crucial part of your financial plan, and why you should speak to an adviser before you cancel any cover you have in place.
Protection is the scaffolding that props up your financial plans
If you’re already a client at Douglas White Financial Planning (DWFP), you may recall the water butt analogy we likely would have used in your first meeting with us.
In this analogy, we explain how your earned income is like the rain coming down into a water butt. You then draw what you need from that water butt to afford your lifestyle.
Meanwhile, you may also use a portion of your income to create “clouds” that represent your pensions and other investments, which will provide the rain into the butt in future.
What you may also recall is the supports we draw under your current earnings going into the water butt to represent your protection cover.
Protection is the scaffold that keeps those earnings coming down into the water butt, ensuring that the rain continues to fall, no matter the external conditions that could affect it.
That way, you’re still able to afford your lifestyle and build those clouds for the future, even if something temporarily or permanently disrupts your earned income.
Providing support against various worst-case scenarios
The purpose of this scaffolding is to cover you and your family against events that can have a devastating effect on your finances.
Even if you make a plan for the rest of your money, it can be entirely derailed by unexpected events and accidents.
There are various different kinds of protection that might be suitable for you, depending on the events that might concern you and what you want to cover. For example, imagine that you:
- Became too ill to work – To protect against this, you could consider income protection, which pays out a regular income (usually around a half to two-thirds of your earnings before tax) until you return to paid work or retire.
- Are diagnosed with a critical illness – In this case, it might be useful to have critical illness cover, which pays out if you’re diagnosed with an illness listed on the policy.
- Are unable to make your mortgage payments due to redundancy, accident, or illness – Mortgage protection insurance can provide help with your repayments in this instance.
- Die unexpectedly – Having a life insurance policy to pay out to your family could help them stay financially stable if you were to pass away.
In these instances, you can see how valuable protection could be. You can make a financial plan that targets your future goals, but if you’re unable to work or you were to unexpectedly pass away, your family might suddenly find themselves in the difficult position of not being able to afford their lifestyle.
This is why protection is the scaffold underneath your long-term plans: it props them up and makes sure you remain financially stable if one of these events were to affect you.
Protecting the need, rather than having as much cover as possible
One aspect to keep in mind is that you may still want to consider your protection in the context of your personal circumstances.
That’s because when you take out cover, you’re doing it for a reason. So, just like any other financial planning you do, your protection cover should still be personal to you and your circumstances.
Imagine that you have young children and a mortgage, and so decide you want to put a life insurance policy in place. That way, you can be sure that your family will be financially supported in the worst-case scenario of you passing away.
In this case, you might take out a life insurance policy that provides a lump sum to your beneficiaries on your death.
But actually, there might be more appropriate options that provide the appropriate cover if you think about the reason you’re looking for protection.
For example, a family income benefit policy might be more suitable. This cover provides a regular income for a specified period of time – so you could set this for either when your children reach adulthood, or for when your mortgage is paid off.
This way, you’re covering the need that you have – to protect your family in the event of your death – rather than paying for expensive cover that provides more than necessary.
Speak to an adviser before you cancel your cover
With all this in mind, you can see how valuable protection can be, and why it’s a potential issue that individuals are cancelling their cover amid the cost of living crisis.
If you’re considering cancelling cover, then it may be worth speaking to an adviser first, because they may be able to suggest a more sensible alternative that suits your circumstances.
For example, rather than cancelling your cover, your adviser might suggest that you reduce it instead.
In the case of life insurance, most providers won’t allow you to increase your term or cover without additional underwriting, but they will often allow you to reduce it – and your payments, as a result.
So, if you were paying £150 a month and wanted to pay £100, you could simply ask your provider what sort of cover you can get for this amount. If you were then happy with it, you could alter the arrangement, saving you money on your monthly payments while still having access to cover.
Some protection is better than no protection, which is why it’s often sensible to first speak to your adviser and adjust your cover if necessary before you think about cancelling it.
Get in touch
If you’d like to check that your needs are covered in the event that the worst happens, please do get in touch with us at DWFP.
Email info@douglaswhiteltd.com or call 0151 345 6828 to speak to us today, and we’ll be more than happy to help.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions.
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