A comprehensive guide to financial protection

What do we mean by financial protection? Just like taking out car insurance so we’re financially covered if something happens to our car, financial protection covers the range of insurance products that are available to provide a safety net if our earning potential is limited for any reason.

This can include being made redundant, or not being able to work due to critical illness. It is also there to provide financial security for our loved ones if we die prematurely.

If you have savings, have you thought about how long your funds would last if you couldn’t work? 

In this article, our team of expert financial advisers at PIL Southampton talks through your options for financial protection.  

Who is financial protection for? 

Quite simply, it’s for just about everyone. None of us know what’s round the corner. Of course, we hope we’ll never be in the position to not be able to meet our financial commitments due to unforeseen circumstances, but life is unpredictable and it’s prudent to put measures in place to take care of things if something does happen.

If you can’t work because of illness, you may be able to claim Statutory Sick Pay (SSP) from the government. The current rate at the time of writing is £116.75 per week (2024/2025 tax year) and, if you earn over £123 per week before tax, you can claim it for up to 28 weeks. It is unlikely to cover all your bills, which is why taking out a policy to give you a financial payout if you can’t work is a sensible route to go. 

Your employer may provide additional sick pay, but this will vary from company to company so it’s important to check your employment contract.

If you are self-employed, you will not be entitled to claim SSP at all, so it is even more important to put measures in place to protect your earnings if you’re unable to work.

No-one wants to think about the worst happening but, if you die, having the right life insurance policy in place will give your family the means to pay off the mortgage, or to cover day-to-day expenses.

Where should I start? 

Let’s break it down into the different areas of financial protection and consider your options for each.

Life insurance 

Gives your family financial security if you pass away, a life insurance policy will pay a lump sum in the event of your death. 

Although you could choose a ‘whole of life’ policy, which would run until you pass away, these kinds of policies generally come with the higher premiums later in life. It is more common for a life insurance policy to have a fixed term, say 20 years. This is often linked to key life events like your children becoming adults or the end of your mortgage term.

Taking out a life insurance policy will give your loved ones financial security and stability at a very difficult time. It could help them to maintain their standard of living and not have to worry about paying the bills or to think about major life decisions like whether they can afford to stay in their home or need to consider moving. 

Many couples choose to take out a joint life insurance policy.  

Family income benefit  

This is an alternative or an additional option to give your family financial security if you die. Instead of paying out a lump sum, it pays a monthly income for a set period of time, i.e. until your children finish full-time education.

Some people prefer to arrange this kind of financial protection to maintain their family’s standard of living, instead of having to manage a lump sum which might be overwhelming for some. 

In the same way as with a life insurance policy, you can choose the level of cover you need, and take out a joint policy if you want to.

Income protection 

Taking out income protection means that you will receive a regular income if you can’t work because you are injured or become too ill.

If your claim is accepted by your insurance provider, your monthly payment will be made for as long as you are unable to work, until you retire or until the benefit/policy term ends. 

How much you receive is usually based on a percentage of your salary – the higher you want this to be, the higher the premium will be. 

In most cases, you can make a claim after an agreed ‘deferment period’. The longer this is, the lower your premiums are likely to be. To help you choose how long you want your deferment period to be, if you are employed you should check your company’s sick pay policy. If they will pay your full salary for six months, for example, you may then choose your deferment period to be six months. 

Or, to keep your premiums lower, you could calculate how long your savings would last before you would need your income protection policy to kick in.

Critical illness cover 

This type of policy pays out a lump sum if and when you are diagnosed with an illness that is listed in the policy terms. 

Note: It is really important that you understand what diagnosis would and wouldn’t be covered in the policy you take out, as an illness not covered would mean you wouldn’t be able to make a claim. The three core conditions that all critical illness policies must include are cancer, heart attack and stroke. As you might expect, the higher the premium you pay, the more comprehensive the list of illnesses is likely to be.

A payout from this type of policy could give you financial security if you can’t work because you are going through treatment.

You can use this money however you choose, for example to pay off your mortgage, adapt your home to accommodate your changed circumstances, or to cover day-to-day living costs.

You can choose a level of cover that will be appropriate for your financial commitments and expenses. 

Business Protection 

If you own a business, you may want to consider financial protection too. Most businesses will have various types of insurances to cover them for unforeseen events. But what about insuring your most important assets, your key employees? How would you cope if one of them sadly falls critically ill or dies? For many businesses, its success can depend on one or two individuals, and so losing one of them could have a significant impact on your profits. 

You might also want to consider protection for shareholders or partners. Without this type of cover in place, if the shareholder dies their family might have to sell the shares to someone else, maybe even a competitor. 

There’s also protection for business loans, as there could be severe consequences if loans aren’t protected, such as an inability to make repayments.

Planning for the future: Lasting Power of Attorney (LPA)

As well as thinking about making provisions for financial cover if they become ill or die, many people take out LPAs. Legally giving someone you trust permission to take care of your financial affairs, or to make medical decisions about your care if there comes a point in the future when you are unable to make decisions yourself, can be reassuring both for you and your loved ones.

There are two types of LPA in the UK you can apply for today. One, the Lasting Power of Attorney for Health and Welfare, covers decision making about your medical care, where you should live and what your lifestyle will be. The other is a Lasting Power of Attorney for Property and Financial Affairs, which could cover paying your bills, managing your investments, and deciding whether property should be bought or sold.

You can only take out an LPA whilst you are capable of understanding what you are signing up to. 

You appoint one or more individuals you trust, known as ‘attorneys’, to make decisions on your behalf. The process is straightforward; you can find the government-issued forms here and fill them out and send them off, or you could pay a solicitor to manage the process for you.

How PIL Southampton can help you 

Our experienced and knowledgeable team of financial advisers would be very happy to guide you through your options and help you to find the best insurance cover to suit your needs.

Your premiums will depend on your level of cover, age, health and lifestyle factors. Our advisers understand the market and can shop around to find the best provider to suit your personal circumstances. 

They can talk through the level of cover you and your family might need, review your employment contract with you to see what benefits they might provide and how this would impact decisions you make on what policies you choose to take out, and they could help you to ascertain what kind of emergency funds you have in place.

If you already have some financial protection policies, our team can go through these with you, to check what level of cover you have before you sign up for more. You may also have a certain amount of cover if you have a fee-paying bank account. 

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.