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Protecting yourself and your family

Why do you need protection?

When you enjoy a regular income, it’s easy to start taking it for granted. The reality is that it only takes one serious illness, injury or death to have a devastating impact on a family’s finances. Putting the right insurance policies in place can give you peace of mind that your family will have a safety net if the unexpected happens.

As life can throw up so many different hazards, there are types of protection available for each kind of circumstances

What if I die or my partner dies?

Life insurance can safeguard your family’s future in the event of your death. You pay monthly premiums, and it pays out a lump sum if you die before a certain time (such as before your mortgage is paid off). This can be invaluable if you are a major or sole household earner. Life insurance providers have a good record of paying out on claims, with a payout rate of around 98 per cent.

If you have a mortgage then life insurance (to cover the mortgage term) is highly advisable, and if you have a partner or dependants then you should definitely get some. This ensures that the mortgage will be paid off in full if you should die. However, you don’t have to choose the policy offered by your provider. An adviser can help you find one better suited to your personal needs.

Some kinds of life insurance can be used to mitigate the effects of inheritance tax. The policy pays out into a trust upon the holder’s death, and this money is then used to pay the tax bill. Talk to your adviser about setting this up to ensure you get it right.

What if illness or injury stops me working?

How would you you and your family cope if an illness or injury kept you off work? Employers typically offer sick pay only for a very limited period, so you may need an alternative source of money if your condition lasts longer than that.

You have a number of options to guard against this situation. Accident and sickness insurance will pay you a regular income, typically for a maximum of 12 months.

If you want to cover yourself against a longer period of incapacity, then you may prefer income protection. This is more costly, but it can replace between 50 and 70 per cent of your earnings for an unlimited period of time – so it can keep paying out even if you never return to work.

Instead of (or in addition to) a replacement income, you may want a lump sum – in which case you could look at critical illness insurance. This will provide you with a single large payment lump sum if you are diagnosed with a ‘critical illness’ (qualifying conditions include heart attack, stroke, cancer, multiple sclerosis and many others). Different policies cover different illnesses and some may be excluded, so have your adviser check all details carefully before taking out any policy.

For each kind of insurance you can set the level of income / lump sum that you require, though higher amounts will of course mean higher premiums. To decide which type(s) suit your needs best, talk to a financial adviser who specialises in protection.

What if I want private medical care?

Private healthcare is increasingly popular among those who feel they can afford it. There are many providers, some offering perks like gym memberships and cash rewards, or throwing in added benefits such as dental plans.

The main advantage of private healthcare is that there may be less waiting involved than by using the NHS. This can mean that if you have a condition that prevents you from working, you may be able to get it treated more quickly by going private, and so get back to work sooner.

However, talk to your adviser about whether or not private medical care is the best use of your money. The other forms of illness protection all have the potential to deliver better value in the case of a debilitating condition.

How to choose the right protection

When choosing protection, it’s important to have an in-depth grasp of how each product works, how and when it pays out, and how it corresponds to your own needs and your attitude to risk. There are also very many competing products on the market, and comparing them can be very difficult (since they depend so much on your personal circumstances). For these reasons, seeking independent advice is especially important when choosing protection.

Your adviser can assess your needs, your family circumstances and the risks you face, recommend the best kinds of protection for you, and then search the whole of the market to find the best-value product in your circumstances.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.