Has the pandemic highlighted a gap in your financial protection?

Financial resilience in the UK was improving before the coronavirus pandemic.

Now, however, a report from the Financial Conduct Authority (FCA) confirms that between March and October 2020, the number of adults with low financial resilience increased by 3.5 million. The number now stands at just over 14 million – that’s 27% of UK adults.

Low financial resilience is characterised by the report as being in debt, having a low or erratic income, or having difficulty meeting credit commitments.

The pandemic has affected everyone’s finances differently. While you may have found saving easy, others have struggled.

LV= reports that half of parents helped grown-up children financially in the three months to February 2020. Meanwhile, 58% of those who retired between March and October 2020 did so because of Covid-19. The FCA blamed poor engagement with retirement planning.

If the pandemic has highlighted any gaps in your financial protection, remember that long-term planning can help. Here’s how.

The importance of an emergency fund

A crucial part of any financial plan is a “rainy day” fund designed to cover immediate costs in the short term, should the unexpected happen.

We would normally recommend keeping between three- and six-months’ worth of household spending aside for emergencies.

The funds can be used if you are made redundant, fall ill, or need to cover a sudden expense, like buying a new car. Knowing you have an emergency fund in place can give you peace of mind that you can stay on track in the short term.

Protection products can help you make ends meet

Protecting yourself and your family against the financial uncertainty resulting from job loss, illness, or even a death, is a vital component of your overall financial resilience.

There are several ways you might choose to protect yourself and your family.

Income protection

If you have dependents reliant on your income, whether for household bills, education fees, or a mortgage, then the loss of that income, even for a brief period, could have serious consequences. It may be that your emergency fund won’t be sufficient to make up the shortfall.

Income protection is an insurance product that will cover a part of your earnings if illness or accident prevents you from working.

After an initial deferral period, it will pay a percentage of your earnings until you can return to employment (or until retirement, death, or the end of the policy term).

Not only will the money help to pay the household bills, it will provide peace of mind that you and your family are looked after, allowing you to concentrate on getting back on your feet.

Critical illness cover 

Whereas income protection can be claimed multiple times during the policy term, critical illness cover will only pay out once. The product provides a lump sum if you are diagnosed with certain conditions set out in your policy document.

Critical illness will normally cover strokes, heart attacks, and some cancers, as well as conditions such as multiple sclerosis and Parkinson’s disease.

It can be uncomfortable to dwell on the possibility of a diagnosis of a critical illness but knowing that the cover is in place will give you and your family one less thing to worry about at an already difficult time.

The money can be used in the way you see fit. This might be to help towards medical bills, to adapt your home, or to upgrade a vehicle. If you don’t have a separate income protection policy in place – and we would recommend you do – the money could also be put towards household bills and other regular outgoings such as bills and school fees.

Be sure you understand the exact conditions that are and aren’t covered when you take the policy out and speak to us if you are unsure about the cover you need.

Life insurance gives you and your family peace of mind

Life insurance pays out a lump sum on your death but there are several types of policies to choose from.

Term assurance

Term assurance plans will pay out a sum assured on death within the policy term. You might use these plans to cover the potential liability resulting from your death before a child finishing school or university. The money would be used to cover the remaining fees.

The sum assured for a level term assurance plan remains constant throughout the term.

Decreasing term assurance

Decreasing term assurance decreases over time. This makes it great for covering a debt, such as a mortgage, that diminishes over time. The longer you have the plan, the less it will pay out, which tends to make decreasing term assurance plans cheaper than their level-term counterparts.

You need to keep in mind that both types of plan only pay out on death within the policy term. Once the term ends, so does your cover.

Whole-of-life cover

Whole-of-life cover, as the name suggests, will cover you for the whole of your life. It guarantees to pay out on death and therefore can be more expensive.

You might find that your plan is reviewable, meaning that the premiums payable to maintain your cover rise as you get older.

Get in touch

The unexpected can strike at any time but building a resilient financial plan can give you peace of mind that you and your family will be protected whatever the future brings.

Please get in touch now and we can help find the right protection cover for you.


About the Author

Dom is a qualified and experienced Chartered Financial Planner (CII) and Chartered Wealth Manager CFP (CISI) and a Registered Life Planner (Kinder Institute) with over 30 years experience. His work primarily focuses on retirement income planning, helping clients to maintain financial dignity and independence in retirement. Read more from Dominic...
This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Please convey our thanks to Jonathan for his diligent attention to our needs and the way he was able to answer all our questions. Graham & Marian Hall

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