The complete guide to financial protection planning

How do you keep your money safe?

It would be tragic to work so hard to build wealth only to see disaster sweep it away. Fortunately, there are ways to lay a strong safety net.

Financial protection is the process of building a set of systems, savings and policies around you and your family to mitigate the harm of illness, injury, death, and fraud on your finances.

The purpose of this guide is to give you a fundamental understanding of how protection works, and how you can use it for your own financial plan.

You will also find text links to research and blogs that will provide further reading and lots of hints, tips, and ideas.

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Protection

While insurance is perhaps the best-known financial product, that doesn’t mean people are interested to find out more about it. It’s part of the toolkit our teams use every day.

What does financial protection apply to?

Take care of your wealth like you should your health

Just as diet and exercise reduces health risks and helps us enjoy life more, financial protection lowers the risk of impoverishment should we fall upon hardship - providing peace of mind.

Financial protection puts measures in place to keep your household finances afloat should certain serious events occur in the future.

Premature death is the first that springs to mind. What would happen to your dependents if your income suddenly disappeared with you? Financial protection helps provide the funds to keep them going.

Serious illness and injury - such as cancer or a heart condition - may also stop you from earning and supporting your family. Again, financial protection helps to minimise the financial impact by providing alternative funds or income streams.

Finally, sudden unemployment and fraud can also be threats to your wealth. Your protection plan should include a strategy to mitigate these risks.

KEY INFO

Who needs protection?

The more you are responsible for, the more you likely need.

Arguably, everyone needs financial protection. The scale and nature of this protection will vary, however, depending on your circumstances, your attitude to risk, and your financial goals.

A young, single entrepreneur with few assets and no dependents will have different protection needs to a middle-aged, home owning couple with three small children.

The younger entrepreneur, for instance, may not be providing vital financial support to someone else. As such, should he suddenly die may not need a life insurance policy to pay out a lump sum. However, he might want to make financial provisions for himself in case he becomes seriously injured and can no longer work to support his lifestyle.

The couple, on the other hand, may have a host of assets built up - property, pensions, cash savings and stock market investments - that need accounting for should disaster strike. They also have their children who need to be financially supported should one (or both) parent(s) die unexpectedly or become seriously injured or ill. Here, the couple may wish to consider a wider range of options including life insurance and other policies like income protection.

Where do you start?

Before you start taking out life assurance, private medical insurance or similar policies it is crucial to check your existing protections. You may have more than you realise.

In particular, employees should check their contracts and in-work benefits to see if these include any “death in service” or medical insurance packages. The former, for instance, can reduce the need for your own life insurance policy since it pays out a lump sum (e.g. 2x to 4x your salary) if you die whilst on the payroll. Please note that cover ceases when employment is terminated so it may be appropriate to have additional cover beyond any employer sponsored schemes.

You should also cost up your liabilities which would still need repaying even if your income stopped. Outstanding mortgage debt, in particular, will need addressing and one way to do this might be through a life insurance policy which is linked to the value of the outstanding loan.

Another area to consider is your wishes if, for example, you die prematurely. You might want certain possessions to go to particular loved ones. You may want your children to enter the care of a specific guardian. If so, then making a will is a key step to consider.

You may also wish to look at setting up a trust to manage your wealth after your passing. Doing this can also help with mitigating inheritance tax (IHT) on the estate you hope to pass down.

First steps

The first layer of protection

Self education

An emergency fund

The first steps of financial protection are the development of self-education and an emergency fund.

Self-education involves finding out ways to protect yourself from fraud and mistakes from financial institutions, and putting them into practice.

The Financial Conduct Authority (FCA) governs financial services firms here in the UK - so you should check a company’s registration before transacting with them.

Delving into more specific issues: cold calls about pensions are common. You should avoid such calls if they visit you. Text scams are also prevalent, and the goal of scammers is often to convince you to click on a link. You can find out more about how to spot these scams and mitigate the damage should you respond to one here.

Staying safe online is also a key part of your financial protection. Be careful to never click on links in emails from unknown recipients. Instead, enter your bank’s website address directly into your internet search bar.

Make sure the websites you visit have a HTTPS prefix at the start of the website address, to show that your connection is secure.

Consider investing in a virtual private network (VPN) for extra security and be careful not to send sensitive information online when using public Wi-Fi.

Consider building up an emergency fund comprising at least 3-6 months’ worth of living expenses. This can provide a vital financial buffer in the event that you lose your job, or encounter an unexpected expense, helping to prevent you from turning immediately to credit.

Your options

Life insurance: term vs. whole-of-life

Find out if you need cover for a period of time, or indefinitely

Life insurance enables your loved ones to access a lump sum when you die. It can be a vital financial lifeline to help substitute lost income and possibly settle a large, outstanding debt - such as the mortgage.

This can be particularly helpful if you leave behind dependents such as young children. There are two important things to note, however. Firstly, if you do not die within the policy’s term then it will not pay out. Secondly, if you miss any of the monthly premiums, it will likely be invalidated.

Affordability is therefore crucial, and a financial adviser can help you find a good deal which fits into your financial plan. Comprehensiveness also matters, however. Make sure the lump sum is big enough to cover your loved ones’ needs should it ever need to pay out.

Consider the type of life insurance which is best for your goals. Term assurance allows you to take out a policy for a fixed period - e.g. until your children all turn 18, by which point they can be deemed “financially independent”. A whole-of-life policy, however, whilst generally more expensive will guarantee a payout upon death (whenever that is) and could also be used to mitigate against a potential inheritance tax liability.

health

Critical illness cover

Protection in the event of serious injury or ill health.

Of course, your ability to earn income for your household may not just be thwarted by premature death. The onset of an unexpected, catastrophic accident or medical condition - such as a heart attack - could also put your family’s financial stability at risk.

One way to address this is through critical illness cover; a policy designed to pay out a lump sum if you are diagnosed with a specified condition. This can give you a much-needed safety net to give everyone time to adjust to a new financial situation.

Bear in mind that many factors can affect your eligibility for critical illness cover - and the cost of different policies. These include your medical history, lifestyle factors and your age. As such, you may wish to change some habits (such as smoking) well in advance of an application to give yourself the best chance of acceptance and lower costs.

It will be important to balance costs with comprehensiveness. The premiums should be fair, but you also do not want to miss out on covering a crucial illness/condition. A financial adviser can help you navigate this difficult issue.

Nearly half of 25 to 44 year-olds are considering taking out income protection insurance to safeguard their monthly income as a result of the Covid pandemic

Source: This is Money

Income protection

Keep a replacement income stream going should you be unable to work.

Critical illness cover is mainly designed to provide financial support in the event of a potentially life-threatening illness/emergency. However, it is unlikely to pay out in certain circumstances - such as being diagnosed with depression.

Here, income protection can be useful. It provides a regular, replacement income - a percentage of your salary - if your condition leads to your inability to work, bridging the gap until you can go back to work. These policies can be long term - e.g. paying out until your retirement - or shorter term, lasting one or two years until you can get back on your feet.

Here, you need to think carefully about how much income you would need from a policy like this. Payment protection insurance, for example, is typically limited to helping you meet the cost of specific debts (e.g. your mortgage).

Also, bear in mind that your premiums will be impacted by multiple factors including your job. Most insurers put jobs into different categories to ascertain the risk involved. Heavy manual jobs will typically be costlier than professional, office-based jobs (for instance). Be careful to check the insurer’s definition of becoming “incapacitated”, as this may vary from yours.

Private medical insurance

The NHS is widely recognised as one of the world’s leading healthcare systems, and we all benefit from accessing medical care which is free at the point of use. However, such a large public system can lead to long waits for treatment - especially if you contract a rare disease requiring specialist treatment.

Private medical insurance (PMI) can be a powerful way to address this, adding to a strong portfolio of financial protection policies by giving you access to private hospitals without needing to pay huge medical bills. Private hospitals also give you the option to have a private room and choose your own doctor.

It is worth checking your employment contract first to see if your workplace offers PMI to staff, prior to opening any policy of your own. Assuming this is not available, however, you might want to consider a range of PMI options - particularly if you think you may need treatment, one day, for something not readily available on the NHS.

Bear in mind that taking out PMI is not the same as taking out car insurance. It is difficult to make savings by moving providers. Indeed, premiums can go up as you get older or if your circumstances change (such as moving to a new house). A financial adviser can help you identify a good range of deals and consider the long-term implications.

Planning ahead

Power of attorney

Make sure your finances are prepared in the event of physical or mental incapacity.

What would happen to your family and the finances if you suddenly found yourself incapacitated - such as in a long coma? It may seem very unlikely, but in the rare event it can cause huge difficulties for loved ones if there is no contingency plan ready.

Power of attorney is a great option to get ahead of this scenario. It is a legally binding document empowering a trusted person (or people) to make decisions on your behalf about your estate, should you no longer be able to decide yourself.

This comes in many forms and it is important to find the right one for your needs and goals. For instance, ordinary power of attorney gives authority to someone else for a limited time period, to act on your behalf. If you lose mental capacity, then the policy expires. Lasting power of attorney (LPA), however, is ongoing, with no set expiration date.

Within the latter, moreover, there are two broad types to consider. There is the property and financial affairs LPA, which empowers someone to make financial decisions for you (e.g. paying bills and collecting pension benefits). There is also the health and welfare LPA, which gives someone permission to decide on your lifestyle such as going into care, washing and dressing.

TAXES

Link into your tax plan

Find an ideal way to reduce costs whilst staying protected.

Many financial protection measures involve taking out insurance policies which means paying monthly premiums. Depending on your circumstances, there may be ways to reduce the impact on your take-home income with some careful tax planning.

Relevant life insurance policies, for instance, are classed as an allowable business expense and is tax-deductible. Similarly, private medical insurance can also fall under this category.

Another important area to consider when taking out insurance is your future inheritance tax (IHT) liability. Like other assets in an estate, life insurance will normally be part of a deceased person's estate. As such, the payout can end up becoming eroded by IHT if you are not careful.

Here, it can help to get financial advice to explore trust options. Putting your policies within the appropriate trust structure can help avoid unexpected IHT problems later, which could erode the financial support you want to bestow to your loved ones.

Financial advice

Understand the options available to you

A financial adviser can help you identify a good range of deals and consider the long-term implications.

How a financial planner can help

The value of professional insight and guidance

Financial protection, as this guide shows, involves far more than simply being careful with your spending. It involves building a comprehensive strategy to help you and your family cope with a wide range of harmful scenarios.

Tying everything together into a cohesive and complimentary plan can be a challenge on your own - especially if you have complex finances and dependents. A financial planner can help you see a clearer picture of what needs to be done to set your affairs in order.

Perhaps you are still not sure what level of protection you need. Maybe you have a better idea after reading this guide, but still need more information to help you in your upcoming planning and decision-making. Whatever the case, we would love to discuss your needs and goals with you so that you and your household have what you need to move forwards with confidence.

Protection planning

The complete guide
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How to safeguard you and your loved ones’ finances

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