How prepared are you for a financial curveball?

   (PA Archive)
(PA Archive)

If you have a browse through your direct debits to insurance companies, what’s on the list? Home, car and holiday insurance? Very likely. Phone insurance? Quite possibly. Pet insurance in case your furry friend falls ill? Of course. Life insurance or critical illness cover for yourself and your family? Hmmm. Not sure. No?

Which is odd because there’s nothing more important than your health and that of your loved ones. And yet this kind of insurance frequently get overlooked. We don’t like to think about the worst happening. We think we are immortal, too young to worry about dying. We see sorting it out as yet another drain on our already-squeezed money and time.

But it is vitally important to assess and put in place plans for if the worst does happen – in the same way that you have insurance in case your roof blows off in a freak storm. We need to protect ourselves and families in the event of our life caving in.

With the cost of living crisis upon us, paying insurance premiums right now may feel unattainable and, frankly, a luxury of sorts. But being covered for all eventualities is vital to your long term financial wellbeing and to manage feelings of stress and anxiety around money.

Here are three main tips for mitigating against the ‘what ifs’ in life:

Start building a ‘solution fund’

This is a pot of cash that you put aside to assist you in a time of need, to cover a financial shock. For example, losing your job, or unexpected costs like house repairs. The cash provides a solution to your problem. Currently, according to Open Money, 29% of people aged 35-44 have no cash buffer to protect them, while just 20% of people aged 18-24 have enough money set aside to fund crucial bills for three months.

How much should you aim to save? Aim for 3-6 months of expenditure. This might feel high initially and overwhelming but remember any amount saved is going to help in a time of need and this is better than having no amount saved.

Where should this cash be saved? It is important to keep these funds in an account that you could easily access but that is is separate to the account you use for day to day spending.

Having this pot of cash will make you feel less stressed and prevent you from taking out debt in a time of need. I like to think of it as an insurance policy that you are paying to your future self, cash that can be used at a later date.

Get your head around life insurance – it’s dull but necessary

For a small payment every month, life insurance pays out your chosen lump sum (tax free) should you die within the policy term. The younger you are the cheaper the cover, so it pays to take it out early. It is important to consider and put protection in place for the people that you leave behind. For example:

  1. If you have a joint debt with someone (eg a mortgage): If you die, your partner would be liable for the outstanding mortgage and would need to cover the full cost of the repayments. While most banks encourage you to take out life insurance when you take on a mortgage, it’s not usually a condition. But it’s definitely a good idea - it would provide cash for your partner to repay the debt.

  2. If you are the main earner in your household and have young children or dependents: If you die, life insurance could provide cash to cover costs to support your children and dependents whilst growing up.

Check with your employer to see if you have life insurance as part of your employment package. Many employers offer life insurance automatically for their employees, it is often called ‘death in service’ and the cover is typically a multiple of your salary.

Think about what happens if you fall ill (yes, it can happen, however often you go to the gym)

Life insurance is for the people that we leave to behind to ensure that they are financially protected. But what if you get ill? Who is going to look out for you? Every year 1 million workers in the UK unexpectedly find themselves unable to work because of injury or illness, according to the Association of British Insurers. There are two main ways of putting cover in place for this, critical illness insurance and income protection.

1. Critical Illness Insurance: This pays a tax-free lump sum if you are diagnosed with a critical illness specified within the policy. This cash can be used as you wish and allows you to focus on recovery rather than stressing about finances. The three most common claims for critical illness are cancer, heart attack and stroke, which account for 80% of all claims.

2. Income Protection: This pays you a tax-free regular monthly income if you are unable to work due to long term sickness or disability. It will continue to pay out until you return to work or retire. These plans usually have a “waiting period” before you can claim and, typically more than 3 to 6 months. They often pay around 50-60% of your gross salary, as the payments are tax-free.

Admittedly, none of this makes for a very cheery conversation but the safety net these measures provide is crucial to protect both you and your family - and for your peace of mind.