Even the best laid plans can go awry. No matter how well you plan and prepare, everyone’s future can be put in jeopardy by an unexpected financial shock. All you can do is ensure you are protected by getting income protection and looking at life insurance. It’s the only way you’ll weather the storm when it comes to financial shock.
The past few years have unfortunately put this at the forefront of many people’s minds. Reminders that the unexpected can derail our plans at any time have been plentiful in recent years.
The effects of Covid-19 continue to play out even as the pandemic slowly recedes, however, the effects of the war in Ukraine and the biggest cost-of-living crisis in decades are creating further distress and disruption.
We are all experiencing the effects of rising food, energy and fuel prices. As of June in the UK, inflation was at a massive 9.4%. The result of this is that many people around the UK are considering their financial future and trying to prepare themselves for the worst.
Unfortunately, these more immediate events leave less room for dealing with the financial effects of unexpected events closer to home, such as illness, accidents, bereavement and unemployment.
Tough decisions
From using up emergency savings and cutting spending to considering insurance products such as income protection, there are plenty of ways to safeguard household finances.
It can be so easy to make snap decisions that may not be the best course of action, especially when times are tight. That risk is worsened by the fear about the financial forecast in many households, and the emotional challenges that come with life-changing events.
Just as impactful might be a partner losing their job, meaning relying just on one person’s income. One thing that often catches people out is if they can’t work. All of these things can lead to tough decisions.
The importance of income protection insurance and critical illness insurance
Both of these can be massively beneficial; however, they offer very different types of protection. Income protection policies give pay-outs to help cover outgoings like mortgage repayments, rent and bills in the situation where you are unable to work due to illness or an accident. They will cover you for a set amount of time (usually until you retire) and you’ll be paid until you’re either able to return to work or until you reach the end of the term.
On the other hand, you have critical illness insurance policies. These can be complementary, as they provide a significant sum on the diagnosis of particular serious illnesses or medical conditions. This can provide a vital financial boost if you’re unable to work or decide you don’t want to.
What is surprising is that eight in ten people have no protection insurance policy in place, while 60% have no life insurance, according to the latest Scottish Widows UK Household Finance Index.
Stand firm where you can
Reducing your spending on non-essentials and lowering your energy usage are the most common ways of cutting costs, according to the Office for National Statistics, and 42% of people don’t expect to save anything over the coming year.
Reducing short-term pressures from sending longer-term plans off track is difficult at the best of times. It is important to ensure you have access to short and medium-term funds so the money set aside for later-life plans can be left alone.
For example, if you have a rainy-day fund, you can turn to this first rather than undermine your longer-term investments. This way you can protect your longer-term objectives.
What can help is to have a purpose in mind for those longer-term investments, for example being able to retire at a certain point, provide for other family members or simply making sure you have options open to you.
Gain perspective on financial shocks
During times of stress, it is easy to fall into the trap of short-term thinking, particularly when there’s no one to provide a broader perspective. Therefore, being able to turn to a professional financial adviser can provide invaluable peace of mind.
An adviser can look at your overall plan with you and identify where to free up funds to help you in the interim period without your longer-term plans being disrupted. An adviser can also offer a second opinion and help work out the best course of action when events take a sudden turn. Certainly, something to consider.
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About the Author / Tony Clark
Tony Clark, Senior Propositions Manager at St. James’s Place. Tony specialises in retirement, tax planning and social care.
