Personal protection can be an overlooked area when it comes to your financial planning. Planning for the future you want, through your savings and investments, often takes precedent over planning for potentially challenging and uncertain times. Yet, what the pandemic has revealed for many people is how close financial vulnerability can be. Sadly, financial uncertainty often follows challenging personal times, whether that be illness, injury, or the loss of a loved one. It is exactly at these times that you, and those closest to you, will benefit most from robust personal protection that has been put in place early.

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Income protection

It can be easy to take your income for granted, especially if you are an employee with a regular wage. But the pandemic has revealed how vulnerable personal finances can become through periods of sickness. In the current circumstances, it is worth considering how you and your family would cope if you couldn’t work. Income protection cover is one option that could enable you to carry on if you did lose your income due to injury or illness.

Research shows that a 40 year old male non smoker has a 4% chance of dying, 14% chance of critical illness and a 29% chance of being off work for two months or more before retirement. There is a 41% chance that any of these could happen before retiring at 67 years old.

Remember, dying isn’t your biggest financial risk. Illness or injury that stops you from working for a while is a much bigger risk to your finances than sudden death. According to research conducted by Royal London, between September and November 2019, over two million people of working age were unable to work due to long-term sickness.

What does income protection provide?

Income protection provides regular payments that replace part of your income if you’re unable to work due to illness or an accident. In general, an income protection policy will pay out until you can start working again, until you retire, or reach the end of the policy term, whichever is sooner.

Income protection typically pays out between 50% and 65% of your income if you’re unable to work. This is because the policy provides tax-free payments and takes into account any benefits you may also receive. It covers most illnesses that leave you unable to work, either in the short or long-term, but these definitions can differ from policy to policy. There’s often a pre-agreed waiting period before the payments start, which is usually between 4 weeks and a year.

Is income protection right for you?

Income protection is a comprehensive cover that can provide income support for a range of injuries and illnesses. It is therefore often more expensive than critical illness cover, which has a more limited range of personal cover. However, it is a protection that is more likely to be used and benefited from.

Critical illness insurance

As the name suggests, critical illness insurance covers the kinds of illnesses that are usually long-term and very serious conditions, such as a heart attack or cancer. When faced with a debilitating illness, the last thing you need is additional worries about how you’re going to keep paying the bills or supporting your loved ones. Critical illness insurance can give you financial support at a time when it is most needed.

What does critical illness insurance provide?

Critical illness insurance usually provides you with a lump sum of money when you are diagnosed with certain illnesses or disabilities. This money can be used in whatever way is most beneficial to you and your family. You may have other income you can turn to while you are ill, such as state benefits or savings, but this may not cover all of your expenses. Critical illness cover can boost your income or be used to pay down a large expense, such as a mortgage, helping you to focus on your health rather than your finances.

Life insurance

Nobody wants to think about the prospect of dying, or what they will leave for their loved ones when they are gone. But if you want to leave your family something in the event of your death, then putting in place a life insurance policy is one way of making sure that they’ll receive what could be a substantial lump sum.

Types of life insurance cover

There are two main types of life insurance policy – term insurance, which pays out if you die within a specified period of time, and whole-of-life insurance, which pays out no matter when you die.

Term insurance can be useful if you want to make sure that your loved ones have the funds they need to pay off any outstanding debts. You can set the term of the policy so it coincides with the term of, for instance, your mortgage.

Whole-of-life insurance can be a tax-efficient way of passing on your assets, as the beneficiaries usually don’t have to pay any capital gains tax or income tax on the payment they receive. However, there are tax implications if the payment takes the value of your estate above £325,000, as this could make it liable to Inheritance Tax (IHT) at 40%.

Is life insurance right for you?

Compared to other forms of cover, such as income protection or critical illness cover, life insurance policies are relatively inexpensive. The main reason for this is that, although death is unfortunately inevitable, the majority of people can look forward to a long and relatively healthy life.

Talk to us

There are many different approaches for personal protection that can benefit you and your loved ones through difficult times. What protection you opt for depends on your circumstances and attitude to risk. It is important to discuss the options with an independent adviser, so you can make an informed decision.

PLEASE NOTE: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. The value of investment can go down as well as up and you may not get back the original amount you invested. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority.


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