Your future is unknown and it’s important to consider the risks and be prepared if things don’t go to plan.
This means thinking about what’s important to you, for example, your family, your lifestyle and your home (rent or mortgage), and making sure they’re protected.
More than one in six working families would receive little or no help from the state and see their income drop by a third, if the main earner became unable to work.
Source: ABI
To work out whether you need protection and what type of protection you might need, it’s important to look at the whole picture.
What savings do you have? Do you have a mortgage or any debts you need to pay? Do you already have any insurance products, and if so what do they cover?
No two people are the same and the type of protection you need will depend on your personal circumstances and stage in life.
Your:
- age
- health
- marital status,and
- whether or not you smoke.
Are just a few examples of the elements you need to consider.
This guide can help you decide how and what you need to protect.
Savings as protection
As well as saving for large purchases or events, it’s a good idea to set aside some money in case you find yourself out of a job, or unable to work.
The general rule is to have enough money saved up to be able to cover your essential outgoings for at least three months.
This way, you have access to an emergency fund which should keep you afloat in the short-term if anything goes wrong.
But it’s not always easy to save three month’s money, and savings can take time to build up and be used up very quickly.
So while having some emergency money is a good idea, combining your savings with a form of protection insurance might be an option for you to consider.
Paying off your debts
Many people have debts, for instance secured loans such as a mortgage, or unsecured debts such as a credit card bill or bank loan.
If something happens to you and your income drops, you’ll still have to pay off your debts, so it’s well worth keeping them under control.
It usually makes sense to prioritise paying off any unsecured debts.
Households which lose their main salary often struggle to meet payments.
Some people in this situation turn to credit to cover expenses such as rent or their mortgage and find themselves getting deeper into debt.
Protection insurance
The type of insurance policy you might need depends on your situation.
- A life insurance policy will pay your dependents a lump sum or regular payments if you die unexpectedly. If you have a partner or children, life insurance can provide you with the reassurance that they will be able to cope financially without you.
- Income protection insurance is designed to support you financially if you can’t work due to illness or injury and your income drops. This type of policy is particularly relevant for anyone who is self-employed and wouldn’t get sick pay.
- You might consider getting short-term income protection insurance. This type of policy will pay out a monthly sum, for a set period of time, if you lose your source of income due to illness, injury or redundancy.
- You might consider critical illness cover, which will cover you in case you get a specific type of life changing condition.
- Payment protection insurance will support you if illness or redundancy means you can’t meet regular payments of your debts.
Will the state take care of you if you have an accident? Do insurance companies pay out when something goes wrong?
This article is provided by the Money Advice Service.
