Financial protection covers the “what if” questions a financial plan can’t otherwise answer: what happens if you become too ill to work, or if you’re no longer around to provide for the people who depend on you. It’s easy to put off, precisely because it’s about things nobody wants to think about – but a plan is only as strong as its weakest point, and for most people, that weak point is what happens if their income stops unexpectedly. It’s one of the areas we look at as part of Wealth Management.
The three main types of cover
Life insurance
Pays out a lump sum (or income) to your family or dependants if you die during the policy term. Common types include level term (a fixed payout throughout), decreasing term (falling in line with a repayment mortgage), family income benefit (a regular income rather than a lump sum), and whole of life cover (which runs for life rather than a fixed term, often used for inheritance tax planning).
Income protection
Pays a regular income (usually tax-free if you hold the policy personally) if you’re unable to work due to illness or injury, until you either return to work or reach the policy’s end date. This matters more than many people realise: employer sick pay is often limited, and Statutory Sick Pay currently pays £123.25 a week (or 80% of average earnings if lower), from the first full day of sickness absence, for a maximum of 28 weeks – a significant income gap for most households if it isn’t supplemented.
Critical illness cover
Pays a one-off lump sum if you’re diagnosed with a condition covered by the policy and meet the insurer’s definition (such as cancer, a heart attack or a stroke), regardless of whether you’re able to keep working. It’s often taken alongside life insurance or a mortgage, to clear debt or fund treatment and recovery costs.
Private medical insurance
A different kind of protection – rather than paying out cash, private medical insurance (PMI) gives faster access to diagnosis and treatment, often used to avoid NHS waiting times for non-emergency conditions. It’s frequently offered as an employee benefit, but can also be arranged personally.
How much cover do you actually need?
There’s no single right answer, but a useful starting framework is to consider:
- Income replacement – enough to maintain your family’s lifestyle, often expressed as a multiple of annual income.
- Outstanding debt – particularly a mortgage, which is the most common reason people first consider protection.
- Future costs – childcare, education, or care for a dependant.
- What you already have – employer death-in-service benefit, existing policies, or savings that could bridge a gap.
Protection and inheritance tax
Where a life policy pays into your estate, the proceeds may increase its value for inheritance tax purposes. Writing an appropriate policy in trust can keep the proceeds outside your estate and allow the trustees to claim without waiting for probate. It’s a straightforward step that’s often missed, and worth reviewing alongside wider Inheritance Tax Planning.
If the worst happens, our Bereavement, Legal & Coaching Services team can support your family through the practical and emotional steps that follow, alongside the financial ones.
Frequently Asked Questions
Do I need life insurance if I already have cover through work?
Possibly still yes – employer death-in-service cover is usually a multiple of salary and stops if you leave the job, so it often isn’t enough on its own, particularly if you have a mortgage or dependants.
What’s the difference between income protection and critical illness cover?
Income protection pays an ongoing income for as long as you’re unable to work through illness or injury. Critical illness cover pays a one-off lump sum on diagnosis of a specific serious condition, whether or not you can still work.
Is income protection worth it?
It can be valuable if you rely on your income and do not have sufficient employer cover or savings. Statutory and employer sick pay is often limited, and income protection is designed to fill that gap for as long as needed.
Should my life insurance be written in trust?
It is often worth considering, but the right trust and beneficiaries depend on your circumstances. A trust can keep the payout outside your estate for inheritance tax purposes and get money to your beneficiaries faster, without waiting for probate.
Review Your Protection with OCM
Protection is one of the few areas of financial planning where a relatively small, regular cost can prevent a genuinely serious problem later. Speak with OCM to review what cover you already have, and where the gaps are.
