Guest blog by Ben Marsland, Financial Advisor (DIPFA), at Parasol Financial Planning
What happens to those around you if you are unable to work, or worse, if you pass away? Can they afford to maintain their current lifestyle? Would they lose their home? Have to work longer hours? How long could you manage with no income?
As homeowners, partners, parents, and particularly as contractors, these are questions that deserve honest answers. In this blog, Ben Marsland, Financial Advisor at Parasol Financial Planning explains why protecting income protection and life cover are so important, and how simple and cost-effective it can be to gain that peace of mind.
Protecting Our Income
As contractors, if you don’t work, you don’t earn. This can quickly become a problem if you’re out of work for an extended period.
Income Protection is exactly what it sounds like: a policy designed to protect your income if you’re unable to work. It’s not there for short-term illnesses like colds or the flu, but for situations where being out of work would cause financial difficulty. This could be due to an accident, illness, disease, or mental health condition.
If your GP confirms that your condition prevents you from doing your job, the policy will pay you a set amount to cover your outgoings to the end of policy whether that’s months or years.
Many people feel pressured to return to work before they’re fully recovered, even if they have company sick pay, because their financial stability is at risk. With Income Protection, you can take the time you need to get better without added financial stress.
Example (illustrative only)
Jenny is the main breadwinner in her family. Without her income, they would struggle to cover bills, pay the mortgage, and maintain their children’s current lifestyle. If Jenny were off work for more than two months, they might lose their home. An Income Protection policy could pay her enough each month (tax-free) to meet the family’s essential outgoings until she can return to work.
Note: Actual cover, benefit amounts, waiting periods, and claims outcomes vary between providers and depend on individual underwriting.
Protecting Our Life
Many people, especially those with a mortgage, have a cost-effective form of life cover called Decreasing Term Insurance (also known as mortgage cover). This policy is designed to pay off the remaining mortgage if the insured person dies, removing one of the largest financial burdens most people face.
Example (illustrative only)
Steve and Fiona are married with two children and have a £250,000 mortgage over 20 years. They love their home, the kids are settled in school, and they have great neighbours. They took out a life cover policy to protect their mortgage. Three years later, Steve sadly passes away. The policy pays out (tax-free) enough for Fiona to clear the mortgage.
However, even with the mortgage paid, Fiona would still need to cover other household bills alone – which could be challenging. This is where Family Income Benefit can help. It pays a tax-free monthly income to the surviving partner or children until the end of the policy term. This could be enough to cover essential bills until Fiona retires or their youngest child finishes education, ensuring financial stability despite the loss.
Note: Actual cover, benefit amounts, waiting periods, and claims outcomes vary between providers and depend on individual underwriting.
Other forms of life cover include:
- Level Term Insurance: Pays a fixed lump sum if you die within a set term. For example, £250,000 over 10 years, payable to your chosen beneficiaries.
- Whole-of-Life Insurance: Has no fixed term and pays out whenever you pass away. Often used to cover expected inheritance tax liabilities, ensuring loved ones aren’t left with a financial burden.
Important Points to Remember
- The right type and amount of cover depend on your personal and financial circumstances.
- All insurance is subject to terms, conditions, and medical underwriting.
- Cover may not be suitable for everyone, and it may not pay out in all circumstances.
- Tax treatment depends on individual circumstances and may change in the future.
- This is a general guide only and does not constitute financial advice. You should seek advice from a regulated financial adviser before taking out any policy.
- Your home may be repossessed if you do not keep up repayments on your mortgage.
Book your free consultation with a financial advisor today.
Parasol Financial Planning is a trading style of Cheetham Jackson Ltd (FRN514951) which is authorised and regulated by the Financial Conduct Authority. We are independent for investment and pension business, and when looking to address protection needs, we will provide advice based on fair analysis of the market. The Financial Conduct Authority does not regulate estate planning or tax advice.
