A robust financial plan may help you build resilience so you and your family are prepared for whatever life may throw at you. For instance, if you save an emergency fund, you may be able to comfortably pay unexpected costs such as home repairs without relying on credit.
Protection – including income protection or critical illness cover – is another important financial safety net that could benefit you in the future. Unfortunately, many people only consider protection in later life when they may have a higher risk of serious illness.
Yet, protection could be equally as valuable at any stage of life because it may support you if you’re injured in an accident. This may be more likely than you realise.
Indeed, FTAdviser reports that 56% of UK adults have been injured by an “everyday misfortune”. This includes injuries from activities such as:
- Cooking
- Gardening
- Playing sports
- Carrying heavy items
- Walking the dog.
As such, you could experience an injury in the course of your everyday life. In some cases, this might seriously affect your household finances, especially if you don’t have adequate protection.
You may struggle to meet your short-term financial obligations
If you’re seriously injured, you may be unable to work while you recover. You will normally be entitled to Statutory Sick Pay (SSP) during this period, but you only receive £116.75 a week for up to 28 weeks in the 2024/25 tax year.
Additionally, your employer may have their own sick pay policy, but you will typically only receive payments for a set period.
As a result, depending on the severity of your injury, you could experience a period where you’re not earning any income until you can return to work. According to Cover Magazine, 22% of injured employees surveyed said they were not paid while they recovered.
This could mean that you struggle to meet your short-term financial obligations including your mortgage repayments and utility bills. Regularly missing payments could harm your credit score and affect your ability to borrow in the future.
In extreme cases, you might risk losing your home if you can’t afford to repay your mortgage.
You could quickly deplete your emergency savings
Your emergency savings could protect you if you’re out of work as you can draw on the funds to pay bills and other essential expenses. This could mean that you avoid falling behind on your payments.
However, you may want to consider how long your savings will last.
According to Visual Capitalist, 38% of 35- to 49-year-olds surveyed said they couldn’t cover their expenses for a month without an income. Additionally, only 25% of people in this age group said they could last four months or more.
So, even if you do have an emergency fund, you could quickly deplete your savings if you’re unable to work for several months and don’t have protection. This could mean that you’re less resilient against financial shocks until you’re able to build your savings up again.
For example, if you’ve already spent your emergency fund on general living expenses and your car breaks down, you may have to rely on borrowing to make the repairs.
It may be more difficult to work towards your long-term financial goals
As well as making it more difficult to meet your financial responsibilities in the short term, an accident could affect your ability to work towards your long-term goals.
For instance, if you’re not earning an income, you may not be making pension contributions. You might not have enough disposable income to pay into other savings and investments either.
Pausing your pension contributions could have a significant effect on the overall value of your pension pot in later life.
According to Royal London, if you earned £35,000 a year and made an employer-matched pension contribution of 5%, you would miss out on £341 a month in your pension if you stopped your payments. This is because you won’t make your own contribution, and you won’t receive your employer’s contribution or tax relief.
Over the course of a year, this could mean you miss out on £4,092 that you would’ve paid into your pension. The wealth in your pension is invested and may grow over time, so Royal London estimates that after 20 years, your pension pot could be £10,575 smaller if you stopped contributions for a year. This assumes 5% investment growth on your pension, net of charges.
Consequently, if you have an accident and can’t earn an income for a certain period, you may find it more difficult to reach your retirement savings goal. Unfortunately, this could mean that you have to make sacrifices to your lifestyle in later life.
Fortunately, the right protection could reduce disruption to your finances if you have a serious accident.
The right protection could help you continue meeting financial obligations and working towards your long-term goals
Protection acts as a safety net when the unexpected happens, so you can continue meeting your financial obligations and saving for the future.
Income protection provides regular payments if you’re unable to work. These funds, which normally match a percentage of your salary, allow you to continue paying your bills. Depending on your level of cover, you may also have enough to contribute to pensions and savings for the future.
Alternatively, you may benefit from critical illness cover if you sustain an injury or are diagnosed with a serious illness listed on the policy. This type of protection pays a lump sum that you could use to cover general living expenses, pay off your mortgage, or contribute to retirement savings.
That said, the specific conditions and injuries covered by a critical illness policy vary, so it’s important to read the terms and conditions in full.
Having the right protection in place means that accidents and serious injuries may not be so disruptive to your financial plan, so you can still achieve your dream lifestyle now and in the future.
Get in touch
If you are yet to invest in protection, we can help you explore your options.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.