If you lost your ability to earn an income due to illness or injury, how long could you cover your basic expenses before it became a financial struggle? How would your family cope with day-to-day expenses after the passing of the main breadwinner? While investing and budgeting are important goals, the smart investor also has a plan in place to cover the what-ifs were the worst to happen.
There are a wide range of products designed to cover your expenses when you are unable to rely on earned income and the earlier you put these financial products in place, the cheaper they are.
In this article, we’ll introduce you to some of the key products you should consider putting in place to provide a financial cushion and reduce the reliance on savings alone if an emergency were to occur.
Income Protection / Disability Insurance
An income protection policy will kick in if you are unable to work due to illness or injury. Before taking the decision to purchase your own personal coverage, ask your employer whether they provide employee coverage. If they do, take advantage of it. Employer provided coverage will often fall into the category of short-term insurance, which pays a proportion of your salary for an average of 3-6 months. The proportion paid out is usually an amount between 60 – 100% of your income at the time of the illness / injury.
Long term insurance coverage is an alternative product which will usually take effect after any short-term benefits have been utilized, or after a waiting period between the time when the disability begins and the time when the cover kicks in. You can determine the period of time that the cover will pay out if you are out of work due to illness or injury and some products will even continue to pay out until retirement age.
Keep in mind that income protection or disability insurance don’t provide cover for redundancy.
While investing and budgeting are important goals, the smart investor also has a plan in place to cover the what-if’s were the worst to happen.
Critical Illness Cover
A critical illness plan is a policy that pays a lump sum amount following the diagnosis of an illness covered by the plan. Not only will it help you to cover your financial needs due to the diagnosis, but if you had to make expensive adjustments to your home for example, to support your lifestyle needs due to the critical illness, a lump sum payment under these circumstances could certainly prove helpful. For most of us, this couldn’t be covered by our savings alone.
You may choose to buy critical illness protection as an additional cover alongside life insurance and although it is combined into a single product, it will pay out on the diagnosis of a critical illness under the plan and will also pay out separately if you were to die.
Life Insurance
A life insurance policy will pay out a lump sum to your beneficiaries after your death which can be used for whatever purpose they chose. An alternative and often cheaper option to the lump sum payment is a decreasing policy which matches the outstanding liabilities you have, such as your mortgage, which will decrease over time. Having a life insurance policy in place can ensure that expenses and outstanding debts are paid off without that burden falling on the family members that survive you. Even if you don’t have an immediate family depending on you financially, you may be an aunt, uncle or godparent and being in a position to leave something to the children in your life could be a gift that you wish to make.
There is a wide range of new and long-established insurance providers on the market. Simply doing an online search will provide you with a great starting point. When determining the level of coverage you require, consider your annual expenses and the period of time you would either require coverage for yourself, or for your beneficiaries. You may alternatively decide that ensuring you have coverage to clear your largest debts is sufficient, but whatever you decide, your aim is to arm yourself with options which don’t require you to rely solely on your savings or investments if an unexpected event were to occur.
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