Be prepared

There are three key products that will ensure you and your family are financially looked after if the unexpected does occur. These are income protection insurance, which provides an income if you’re unable to work as a result of an illness or injury; life insurance, which pays out if you die; and critical illness cover, which provides a lump sum if you are diagnosed with a serious illness such as cancer or heart disease.

Income protection

Of the three, income protection should be your first consideration as Mike Gough, executive director of financial consultants Jelf Private Clients, explains: “Your income pays for everything so it makes sense to protect it. You’re more likely to be off work for six months or more as a result of illness than you are to die before you’re 65.”

The price of cover, which pays a maximum of two thirds of your gross salary tax–free, can be adjusted to fit your budget by increasing the waiting period or reducing the benefit. Income protection would cover you for stress and back pain – the two most common reasons people are off work.

Life Insurance

Life insurance is an important consideration if you have any financial dependants. Ideally you’ll need enough to cover your debts plus sufficient to provide an income to support your family until your kids have left home or beyond. “Cover’s cheap,” says Gough, “especially if you buy it while you’re in your twenties or thirties”.

He also recommends going for guaranteed rates. “They can be more expensive to start with but you won’t get any surprises later on,” he explains. 

Rather than paying a lump sum, you could take out cover that pays an income to the end of the term. This form of life insurance, known as family income benefit, can fit income requirements better than a lump sum and is also cheaper than the traditional product.

Critical illness cover

Paying a tax-free lump sum if you are diagnosed with a serious illness such as cancer, heart disease or a stroke, critical illness cover is often sold alongside life insurance. The average payout is £80,000, according to Aviva. To get the payout, policyholders will need to survive 28 days after diagnosis. “Premiums can be very expensive and, because more and more people are surviving these conditions, policies can be full of exclusions and policy rules,” says Gough. 

However, while providers of critical illness have been criticised in the past for rejecting a large number of claims, the industry has recently tried to clean up its act and is now paying out 88% of claims. 

If you don’t take out protection the state will step in, but it’s unlikely you’ll get the standard of living you would like. For example, get an illness that means you’re unable to work again and, once your employer’s sick pay is up, you’ll get employment and support allowance. This gives you a weekly benefit of £68.95 rising to £91.40 after a year. “It’s not much,” says Gough. “Taking out protection needn’t cost much and gives you the peace of mind your plans won’t be jeopardised if something unexpected does happen.”  

Get an emergency fund

Don’t forget to put some savings aside for emergencies too. Anything from three months to one year’s salary in an easy access savings account or cash ISA will give you some financial breathing space. It can also help to reduce your income protection premium, as you’ll be able to increase the waiting period before any benefit is paid.