Feeling the Pinch? Keep Your Monthly Protection Policies

As the effects of inflation start to take hold, households across the country will be looking for ways to save money.

The factors leading to the cost of living crisis are not surprising – they include the after-effects of the pandemic, global supply chain shortages, and disruption to energy supplies. The costs of goods and materials are increasing, which pushes prices up throughout all industries.

This means that basic essentials, such as food, household energy, and fuel (and by extension, public transport and delivery services) are taking up a higher proportion of the monthly budget. Lower income households will feel the greatest pressure as they already spend more of their money on these items.

It’s a good time to review your budget and cut back on non-essential spending. If you have monthly insurance policies, you may be wondering how essential these really are, especially if you set them up some time ago. But when the economy is facing challenges, it’s important to make sure that your protection plans are as robust as possible.

What Types of Cover Do You Need?

Car insurance is required by law, and your mortgage provider will probably require you to have suitable buildings and contents insurance. If you are considering cancelling these, you should probably be thinking about selling your car or downsizing your home.

This guide is more concerned with personal protection policies. While most mortgage providers require you to hold life cover to protect your borrowings, other types of protection are entirely optional.

But just because you can choose to go without these insurances doesn’t mean you should. The following types of insurance are strongly recommended for most people:

Life Insurance

A life insurance policy is designed to pay out a lump sum when you die. There are several variations you can select, for example:

• Decreasing, level, or increasing cover.
• A joint or single life policy.
• Fixed term, renewable, or whole of life.

Your life cover should be enough to clear your mortgage and any other debts if you die. You should also think about your other financial responsibilities. Could your family cope financially without the main breadwinner? Also don’t underestimate the value of a primary carer. Provision should be made to cover increased childcare and household costs.

Life policies can be placed in trust to speed up the estate process and avoid being subject to Inheritance Tax.

Life cover is cheap when you are young and healthy, so it’s a good idea to take out as much cover as possible early on. Alternatively, look for a policy that can be increased later without additional medical evidence.

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Critical Illness

A critical illness policy pays out a lump sum if you are diagnosed with a serious illness. This may be included within your life cover policy or separate. Some policies will pay out on first event only, i.e. if you claim for critical illness, your life cover will no longer be valid.

Companies vary in terms of the illnesses they cover. If the condition is not on the list, the insurer will not pay out. Older policies can sometimes be more comprehensive as they may cover conditions which are now less ‘critical’ due to medical advances. Newer policies will often include staged cover – you can claim a smaller amount for more minor conditions, with the full payout reserved for the most serious diagnoses. All claims would be subject to an overall limit.

It can be difficult to judge the amount of critical illness cover you need, as you can’t predict the severity or duration of the illness. It may be life-changing, or it might simply require a few months off work. You should take into account your circumstances, family situation, and budget when deciding the amount of cover required.

Income Protection

Income protection is sometimes overlooked, but people of working age are more likely to suffer a chronic illness or disability than to die. Income protection allows you to replace your monthly salary if you are unable to work for health reasons.

The amount of cover will be capped at a percentage of your salary, normally between 50% and 75%. Benefits are tax-free, and will start to be paid once you have been unable to work for a set period, e.g. six months. You can choose the deferral period, the plan term, and the period over which any claim will be paid. The more comprehensive the cover, the more expensive it will be.

What Happens if You Cancel Your Cover?

If you cancel your direct debit, most insurers will allow you to reinstate your cover within a short period. However, once the plan is fully cancelled, you can’t change your mind.

The consequences of being without cover are clear – your family may face considerable financial hardship during an already difficult time.

But you also need to consider the potential difficulty of obtaining cover later in life. The older you are, the higher your premiums will be. Additionally, if you have any medical conditions before you set up the new cover, this could affect your premiums or even result in you being uninsurable. You may also find that the type of policy you had is no longer available.

If you are finding it difficult to pay your monthly premiums, the situation is unlikely to improve if you need to take out cover later.

Saving Money and Reducing Risks

Clearly, cancelling your insurance policies is not the answer. In fact, you probably need more cover, not less – the majority of people in the UK are under-insured.

Instead, consider the following options:

• Review your monthly direct debits for any unused subscriptions or memberships. You should cancel these before reviewing your insurance.
• Some of your insurances may not be essential. Many home and vehicle insurance policies include cover for personal possessions or roadside assistance, which means you don’t need to pay for these separately.
• Shop around for the best deals on the cover appropriate for your needs. You might have perks you don’t need included in your monthly premium. You can use an online comparison site or speak to a financial adviser.
• Aim to reduce debt or transfer existing borrowings to a better rate.
• Check with your employer if you have any death in service benefits, critical illness, or income protection included in your contract. Perhaps they would consider setting up a scheme. Group policies are often more cost-effective and tax-efficient than individual policies.
• If you do manage to free up some of your monthly budget, aim to increase your cash reserves. This can provide a valuable safety net if you are faced with unexpected costs or a loss of income.

Disclaimer: The information provided in this blog post is for educational purposes only and should not be considered as financial advice. Consult with a qualified financial advisor before making any investment decisions.

The Financial Conduct Authority does not regulate Inheritance Tax Planning.

The benefits to the treatment of tax will depend on your individual circumstances and may be subject to change in future.