This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, it is subject to change and we are not responsible for any errors or omissions.
How can you provide an effective safety net for your finances? A good starting point is to hold a strong set of emergency savings (e.g. 3-6 months’ worth of living costs) in an easy-access account. However, this will only take you so far in the event of a serious illness or accident which stops you from working.
This is where financial protection policies can help. Broadly speaking, there are two main options: policies which provide a replacement income (e.g. income protection), and policies which offer a lump sum (e.g. critical illness cover).
Which type is best for securing your financial protection? Our financial advisers explain their respective pros and cons below. We also show how these policies can be integrated into a wider financial plan, helping you maximise your cover at the best value for money.
If you want to discuss your financial plan with a member of our team, please get in touch to arrange a no-obligation financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu
Option 1: income protection
If you find yourself unable to work due to an illness or injury, this could seriously destabilise your finances. In the UK, certain benefits are available, such as Statutory Sick Pay (SSP), which provides £116.75 for up to 28 weeks. However, such benefits are limited and temporary. Self-employed people typically struggle even more since SSP is not available to them.
This is where income protection can be helpful. It provides a replacement income if you find yourself suddenly unable to work due to sickness or disability. It can continue until you return to work, or until you retire. As such, the longevity is greater than SSP.
Income protection pays varying amounts depending on your policy terms and premiums. However, a general ballpark is two-thirds of your previous salary (or self-employed earnings). The income is not subject to Income Tax.
Option 2: critical illness cover
Critical illness cover is similar to life insurance in that it pays out a lump sum when its conditions are fulfilled (indeed, the two are often “bundled together” in one policy). The key difference is that life insurance pays out when the policy holder dies. Critical illness cover pays out if the holder is diagnosed with a specified medical condition.
Not all medical conditions are covered by critical illness cover. However, it can cover many important ones – e.g. various cancers, heart attacks and strokes. Similar to income protection, any payout from your critical illness cover policy is tax-free.
Evaluating the two policies
There is no “one-size-fits-all” approach to income protection and critical illness cover. Every client is different in their financial goals, needs and situation. Deciding between the two is, therefore, a very personal decision that must take each person’s unique factors into account.
For instance, critical illness cover might be preferred by individuals who face large expenses which cannot easily be covered by a replacement monthly income (e.g. childcare costs or private school fees).
By contrast, another person may not feel comfortable handling a large sum of money received all at once. They might worry about recklessly spending it, rather than managing it responsibly. A replacement income helps guard against this and can provide peace of mind – especially for many self-employed people – that their monthly expenses will continue to be covered.
Building a comprehensive protection plan
Before embarking with a protection policy, it is generally wise to examine your existing protection plan to see if any “gaps” (or weaknesses) exist. Do you already have a critical illness or income protection policy? If so, does it still meet your needs?
For example, perhaps your circumstances have changed (e.g. you have had children), and you need to update your cover. Maybe you want to expand your cover to include your dependents. Consider examining your protection with a financial adviser to ensure you have not left your finances vulnerable.
If you are employed, does your employer offer any protection which could reduce (or remove) the need for you to take out your own policies? Notably, consider asking whether your employer offers a “death-in-service” benefit. This can pay out a multiple of an employee’s salary (e.g. 4x) if they die whilst still an employee.
An employer might also offer various benefits, such as workplace critical illness cover, additional (or extended) sick pay or group private medical insurance. Again, any protection benefits that are available from your employer are benefits that you do not need to pay for out of your pocket!
When building a protection plan, make sure that you integrate your policies wisely into your broader financial plan. For example, be careful about inheritance tax (IHT), which could be levied on the proceeds of a policy (e.g. a critical illness cover payout) depending on how the policy is structured. Seek financial advice to discuss and identify the best arrangement for you.
Invitation
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu