Financial protection is an important part of financial planning because it considers what would happen to you and your family if something went wrong.
Building investments, pensions and savings can help you achieve your long-term financial goals, but your financial plan could be disrupted if you became seriously ill, were unable to work or died unexpectedly. Financial protection uses insurance and wider financial planning to reduce the financial impact of these events.
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Why Is Financial Protection Important?
One of the first questions to consider is what would happen to your family’s finances if you could no longer earn an income.
You may have a mortgage and other debts to repay, regular household expenses, school fees or children who depend on your income.
Financial planning can identify these potential vulnerabilities and calculate how much money your family might need if your income disappeared.
Protection can also be important for business owners, particularly where the success of a company depends heavily on one or more individuals.
Life Insurance
Life insurance is designed to provide money to your beneficiaries if you die while covered by the policy.
Term life insurance provides cover for a specified period, while whole-of-life insurance is designed to provide lifelong cover as long as the required premiums continue to be paid.
The appropriate amount of cover will depend on your circumstances. You may want sufficient insurance to repay a mortgage, replace lost income or provide money for your children’s future.
Life insurance can also be used as part of estate planning. For example, a suitable whole-of-life policy written in trust could potentially provide beneficiaries with money towards an inheritance tax liability rather than requiring other assets to be sold.
Income Protection
Income protection is designed to provide an income if illness or injury prevents you from working.
Rather than receiving a single lump sum, the policy generally pays a proportion of your earnings after an agreed waiting period.
This can be particularly important if your household depends heavily on your salary and your employer’s sick pay would only cover you for a limited period.
When arranging income protection, you should consider how much income you would need, when you would need payments to begin and how long you would want them to continue.
Critical Illness Cover
Critical illness or serious illness insurance is designed to provide financial support if you are diagnosed with certain specified serious medical conditions.
Unlike income protection, it will commonly provide a lump sum following a qualifying diagnosis. This could be used to repay debts, cover household expenses or provide additional financial security while you undergo treatment or make changes to your lifestyle.
The illnesses covered and policy conditions vary between insurers, so it is important to understand exactly what a policy provides.
Financial Protection for Business Owners
Business owners may have additional protection requirements.
The death or serious illness of a key employee, director or shareholder could have significant financial consequences for a company.
Protection planning can therefore include key person insurance and arrangements designed to help business owners retain control if a shareholder or partner dies or becomes seriously ill.
When Should You Review Your Financial Protection?
Financial protection shouldn’t be something you arrange once and forget about.
Major life events such as getting married, having children, taking out a larger mortgage, changing jobs, starting a business or retiring can substantially change the amount and type of protection you need.
Reviewing your insurance alongside your wider financial plan can help ensure your cover continues to reflect your circumstances.
How Can Financial Planners Help With Financial Protection?
Financial planners like Saltus provide financial protection and life insurance advice as part of its wider financial planning service.
Saltus advisers can assess the potential financial impact of illness or death and help determine the appropriate level of insurance to protect you and your family. This can include planning to maintain your lifestyle and income if you cannot work, providing for your family following death or serious illness, and putting cover in place towards a potential inheritance tax liability.
For business owners, Saltus can also consider how the death or serious illness of a key individual could affect a company and how insurance could help reduce that risk. It can also advise on protection where the death or illness of someone within a partnership could affect ownership or control.
The objective is to make financial protection part of your overall financial plan, so that your investments, retirement plans and family’s financial security are not unnecessarily put at risk if the unexpected happens.