The protection products you need (in order of importance)
Hopefully, you will never need to use them, but if you do, financial protection products will prove to be the greatest investments you ever made. Nobody knows what is coming round the corner, and when things go wrong financial protection can help you and your loved ones to live fulfilling lives whatever the world throws at you.
Your security blanket should be built of a number of layers. You may not be able to afford them all, so I explain them in order of their importance.
Most important of all is your emergency cash buffer. Everyone should hold cash equivalent to 3 to 6 months’ income – double that for people in their 40s and 50s. If something does go wrong, you do not want the stress of having to borrow money straight away.
Next comes income protection insurance – the bedrock of your protection – which pays out an annual income in the event that you become incapable of work due to sickness. If you can’t work long term, then your entire financial security is threatened unless you take out income protection.
You may already be covered through your employer, so check what you already have before you buy. Insure between half and two thirds of your income, index-linked to at least age 60 or 65, depending on when your pension kicks in. Watch out for contracts which only pay out for two years – they may be cheaper, but if you need to claim you will regret it.
Next is life cover, which is more for your love ones than yourself. If you have a mortgage, definitely cover that. But if you have children, think how much your partner will need to raise them until they can fend for themselves.
Family income benefit, which pays an income stream rather than a single lump sum, can work out more efficient for people with children. Whichever you choose, insure your partner as well – joint policies don’t cost that much more. Again, check if you have death in service life cover through your workplace before buying.
Sign a nomination form to put your policy in trust – the insurer will have a form. Otherwise any payout will form part of your estate and could be liable for inheritance tax.
Finally, a nice-to-have is critical illness cover, which pays out cash sums in the event you develop certain illnesses. It means you won’t have to worry about work and can focus on getting better. But read the small print as certain conditions won’t be covered and pre-existing conditions will be excluded.
Whatever policy you are looking to take out, always check whether you can buy it through your employer. Even if they don’t give it you free, employers often sell protection at big discounts.
Anna Sofat is managing director of Addidi Wealth Management