Getting the right financial protection for your family

Why do you need financial protection?

Illness or injury can happen to anyone. In most cases, it will hopefully be short-lived so that you can get back to work and your normal life quickly. If you need to take more time away from work, for example, because of a serious illness, it could impact your income and your family's finances.

Appropriate family protection policies can fill the gap, ensuring you can pay the bills and maintain your family's quality of life. You can take out financial protection insurance whether you're self-employed and will lose income quickly if you can't work or are employed, and your earnings will reduce gradually the longer you're away.

How does financial protection work?

Protection insurance works in different ways depending on your policy type. Some policies provide financial support in the form of a monthly income, and some give you a lump sum. You can also take out insurance policies to cover other debts, such as your mortgage or car loan.

You can choose a mixture of insurance policies to cover different things. With each type, you'll pay a monthly or annual premium and claim on the policy when needed.

Check to see what employee benefits you have

If you're employed, check what employee benefits you already have before you take out any insurance. Most employers offer life insurance and a pension, but some also include income protection and critical illness cover as part of their employee benefits package. This will prevent you from paying for cover that you already have.

It's also a good idea to have a look at their sickness absence policy. Some companies will only give you statutory sick pay during any absence, while others will continue to offer full pay for a few weeks or months before decreasing your payments in stages. Understanding how much you'll likely be earning in the event of an absence allows you to tailor your insurance cover appropriately.

Your employee benefits may also include access to well-being services to support your mental health and help you to deal with stress, particularly if you have health insurance. Services like these can be invaluable during an absence from work, so check to see if you can access an employee assistance programme.

What types of financial protection are available?

Life insurance pays out a lump sum when you die that you can pass on to your family or other beneficiaries. In this guide, we're focusing on insurance policies that pay out while you're still here. We'll look at three different types of insurance policies; income protection insurance, critical illness cover and mortgage protection insurance.

Income protection insurance

Income protection pays you a monthly income when you can't work due to illness or injury. You can use the income to pay your household bills, school fees and to allow your children to keep attending their usual clubs and activities. You can focus on your recovery without worrying about the bills. It also reduces the amount of stress on your family, particularly your children, as their lives can continue as normal.

Before looking for quotes, consider your circumstances and how much your policy will need to cover each month. Statutory sick pay is only £109.40 per week for 28 weeks, less than minimum wage, so you'll likely have a significant shortfall.

Some policies cover rehabilitation services to help you recover, which could help you return to work sooner.

How does income protection cover work?

Income protection insurance will give you a monthly payment equivalent to a fixed percentage of your usual earnings, usually between 50% and 70%. Your policy won't pay out 100% of your income because you pay for your policy with wages you have already paid tax on, so payments are typically tax-free. The calculation also works on the basis that your expenses will likely be lower if you usually work in an office and don't have to travel to work.

In contrast to the 28 weeks of statutory sick pay, you'll receive from the Government, your income protection policy payouts will continue until you return to work or reach retirement age, whichever is sooner. Insurers used to use the state pension age as the standard retirement age. However, policy coverage now recognises that many of us are working for longer. Some providers offer coverage up until 70 years of age. You can choose your expected retirement date, so if you plan to stop working at 55, you're much less likely to experience ill health and claim on your policy, so your premium may be cheaper.

Your policy won't start paying out immediately. You'll need to choose a deferral period, which is the length of time between the start of your absence from work and the date when the payments start. The minimum is typically four weeks, but you can choose a more extended period depending on your circumstances. For example, if your employer pays you your full salary for six months, you can start your payments when this ends.

Critical illness insurance

Critical illness cover pays out a tax-free lump sum when you're diagnosed with a serious illness such as cancer or if you have a stroke or heart attack. You can use the payment in any way that suits your circumstances. You can use the money to replace your monthly income and support your family financially until you can return to work. If your illness has resulted in a permanent disability, you may need to fund adaptations to your home. Alternatively, if you have a terminal illness, the money could allow you to spend quality time with your family or to cover funeral expenses.

A critical illness policy only pays out a lump sum if you're diagnosed with a condition listed on your policy. Most insurers cover cancer, multiple sclerosis, Parkinson's disease, strokes and heart attacks. Others include Alzheimer's disease or disabilities with another cause, for example, limb amputations. If you know you're at risk of a particular condition, check the policy quote to ensure it's covered. There are sometimes other terms and conditions too. For example, your policy may only cover specific types of cancer or only pay out if your condition has reached a certain stage.

How does critical illness cover work?

You can buy critical illness insurance in two ways: as a single policy or an optional extra with your life insurance. Simple claim when you're diagnosed with a condition listed on your policy, and it pays out a lump sum. It's important to remember that any critical illness policy will only pay out once. Once you've made a claim, your coverage will end.

Adding critical illness coverage to your life cover can be a more cost-effective option. Still, it's a good idea to take professional advice to help you compare quotes and make an informed decision. A broker can also help you compare different types of critical illness policies and decide what coverage you need.

For example, you can opt for level cover, where your lump sum remains the same throughout the policy's life, or decreasing cover, where the payment reduces over time. Decreasing cover is often cheaper and is ideal for covering mortgage payments or other debts that fall as you pay them off.

You can also decide to cover your partner or children; some policies will give you a lump sum if your child becomes ill, allowing you to take time off work to look after them.

Mortgage protection insurance

As the name suggests, mortgage protection insurance (or MPPI) helps you to pay your mortgage when you can't. There are different types of policies. Some only pay out if you've been made redundant, others provide cover if you can't work due to illness, and some cover both.

MPPI is generally best if you can't afford other types of coverage that give you a lump sum or provide a higher monthly income. Life insurance can also play a part, as you can choose a policy that will leave your family mortgage free if you die. In any event, you'll likely have needed to take out a life insurance policy as part of the approval process.

There are alternatives to MPPI, which we've already mentioned. You could opt for a policy that will pay a percentage of your salary, allowing you to pay all your usual outgoings, household bills and other day-to-day expenses. Alternatively, critical illness or life cover can provide a lump sum payment you can put towards your regular costs in any way you choose. Crucially, the sums these policies pay will usually be higher than you'll receive with a mortgage protection insurance policy. However, this type of policy is still worth considering if your mortgage is your most significant monthly expense.

How does mortgage protection insurance work?

MPPI policies give you a regular monthly payment, starting when you've been away from work for between 30 and 60 days. Depending on your policy, you'll receive payments for between one and two years. This makes them cheaper than other types of protection as they provide less coverage.

There will be conditions on your policy, depending on the type of coverage you choose. For example, suppose your policy pays out when you become ill. In that case, you may need to provide details of your medical history, and your insurer could decide to exclude any pre-existing conditions. If your policy covers you when you're out of work, your insurers may reject your claim if you've been sacked for gross negligence or left voluntarily.

You may think an MPPI policy is the only type of cover you can afford. However, it's worth getting quotes for other policy types so you can make an informed choice.

Getting professional advice

If you want to put the right financial protection in place for your family's future, our specialist brokers provide advice tailored to your circumstances. Get in touch with us for a comparison quote.