Financial protection is likely something you rarely think about, but it should be a part of your overall financial plan. What could happen if your income were to stop all of a sudden for a period of six months or even more? Many people ignore financial protection and generally see it as something that just isn’t suitable for their situation. However, if you lose your main source of income and it would impact your lifestyle, it’s certainly worth looking further into your options.
Financial Protection Is Triggered By Life Milestones
There’s generally a lack of awareness around how financial protection can increase security and provide you with peace of mind. According to a recent report, it’s often major life milestones that trigger the idea to look into how these types of products can form part of your financial plan. Starting a family or buying a house are seen as the biggest of triggers for taking out protection, followed by an increase in salary. However, these milestones often happen later on in life.
So, if you’ve not yet reached the traditional milestones, does that in turn mean you don’t need any type of financial protection? In many cases, it is still very worthwhile.
In example, you may not own your home and could be paying off a mortgage, but if that’s the case, you’re most likely paying rent. Falling into arrears with your rent can be just as stressful as missing mortgage payments. Unexpectedly losing your income could have a long-term impact on your lifestyle and your wellbeing, if you don’t have a backup plan in place. People often don’t purchase their first home until they’re in their thirties and it’s important to start considering financial protection before this period in your life happens.
It’s very similar to waiting until you start a family. Having children often means parents consider how their family would cope if their income were to stop or they passed away. However, losing the income of the main earner in the house may have just as big of an impact on your partner and other loved ones even if children are not involved. Taking out some form of financial protection can give you peace of mind about your security and your family’s.
Financial Protection, Do I Need It?
When deciding whether or not you need financial protection, you should look at your ability to pay for your essential outgoings at the very least, should your income come to a halt, rather than specific life milestones. If your income were to stop now, how long could you financially survive for? It’s an answer that boils down to two factors:
- Savings: As a general rule of thumb, it’s recommended that you should have between three and six months of cash accessible to cover financial shocks, including not being able to work. This will provide you with a crucial financial safety net. As well an emergency pot, you may have other types of savings and investments that you could withdraw from, should your income stop for a longer period of time.
- Sick pay policy: You should also contemplate whether you’d receive any financial help if you were unable to work due to being ill or serious injury. Statutory Sick Pay is only £94.25 per week for a maximum of 28 weeks and is a very poor amount of money that will not cover the basic costs of living for pretty much all families. However, some employers do offer a better sick pay policy that provides a greater level of financial security.
Remember, it’s not only the bills you pay out that should be taken into consideration, but where other costs may increase if you were to become ill. In example, you might not be the main breadwinner in your family, but perhaps you are the main carer for your children. If you become too ill to continue looking after them as you do now, you might find that childcare costs are significantly higher, placing a great deal of pressure on your finances.