Home Insights & Advice The importance of protection in financial planning

The importance of protection in financial planning

by John Saunders
1st Nov 21 5:10 pm

Thinking of the future can be a daunting process, especially when it comes to your financial situation in your retirement, or how your loved ones will be supported in the event of your death.

But, having the right type and level of financial protection in place is important, to ensure that your objectives are met. In fact, some might say it is just as important and effective as growing your wealth or putting money into your pension.

This, of course, is dependent on your personal circumstances and goals. But it is never too early to start planning your future, and to include any protection needs as part of your plan, to secure your financial future.

What is protection?

In simple terms, protection is an insurance that ‘protects’ against financial loss. It comes in many forms (which we’ll explain in a further section), but essentially involves paying a monthly or annually premium to a provider, in order to receive financial protection or reimbursement against losses, from said insurance company.

You’ll most likely be familiar with car or home insurance that protect those assets in your life, but most people forget to insure perhaps the most important asset of all — themselves. If you are earning in excess of £100,000 per year, or have dependants reliant on your income, then you should consider consulting a financial adviser, who can help you implement the right protection for you.

Why do I need protection?

The most common and most impactful of events that can affect your financial situation is through illness or death. Without protection you may find that you have concerns surrounding your income levels if you become too ill to work. Likewise, if you find yourself in that situation, how will you provide for your family or pay your mortgage?

According to The Institute and Faculty of Actuaries, and their study into mortality and illness, a couple in their 30s have a 59% chance of being unable to work for longer than two months, due to an illness. There is also a 27% chance of suffering from a long-term or debilitating, serious illness.

You may not want to think it, but you should also consider protection for the event of your death. Referring back to the same study of mortality and illness, there is a 9% risk of one member of couple in their 30s dying before they reach retirement age.

Having the right protection in place can ensure your loved ones are financially supported in such a case. Likewise, it can help protect your business or a partnership structure if a key individual passes away.

Furthermore, and according to saltus.co.uk, consulting with a financial adviser and investing in protection, can alleviate concerns of paying an inheritance tax bill, without needing to sell the family home.

What insurances should I have in place?

The types of insurance you need, as previously mentioned, are dependant on your own personal situation. By conducting relevant research or with help from a financial adviser, the right type and level of protection will cater to your own circumstances.

Here are some of the main insurances to consider:

  • Life insurance

This type of insurance involves a lump sum pay-out or a regular tax-free income from the provider to your nominated beneficiaries, in the event of your death.  There are further sub-categories of the different types of life insurance you can get.

For example, a whole of life policy can include a pay-out of an agreed sum, guaranteed upon death. This can also be an important protection in retirement, in particular, and can cover you against inheritance tax liabilities.

  • Income protection

This essentially works as a salary replacement. The cover from the provider pays a tax-free monthly income, on the occasion that you are unable to work because of injury or a health condition.

  • Critical illness cover

This also involves an insurer paying out a lump sum or regular tax-free income, but covers you if you are diagnosed with a serious illness or have had complex surgical procedures. This can provide you with support to renovate your home, if needed, or help with private medical treatment.

Whatever your financial objectives, you should be thinking of the risks involved that can cause detrimental repercussions, and how you can use protection effectively to see that you achieve your goal.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any financial decisions. Appropriate independent advice should be obtained before making any such decision.

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