Your money or your life: how to protect your pay packet
Right now, job security is uncertain, unemployment figures are rising and the mere mention of redundancy is enough to send shivers down people's spines.
However, recession or no recession, illness, injury and even death are all risks we face every day.
For me, the importance of protection insurance only hit home last year when my next door neighbour fell down the stairs, broke her leg and ended up out of work for four months.
This got me thinking: if something happened to me tomorrow and I couldn't work, how would I support myself?
Scary stats
Most of us - myself included - probably walk around thinking ‘It will never happen to me.'
However, the sad reality is that thousands of people each year suffer misfortune which seriously affects their health, wealth and happiness.
According to the Office for National Statistics (ONS), redundancies shot up by a whopping 175,000 between March 2008 and March 2009. This means the redundancies level for the three months to March 2009 stood at a terrifying 286,000 - its highest level since records began in 1995.
Recent research from Friends Provident is equally thought provoking. It states that over 800,000 men die of cancer each year, 52,000 die from coronary heart disease and over 21,000 die as the result of a stroke.
Sadly, statistics from Cancer Research UK show that women are just as vulnerable to serious health risks. The NHS breast screening programme diagnoses around 10,000 cases of breast cancer each year in England alone.
Protection possibilities
Having the right insurance in place will help protect your family's finances should accident, sickness, death or unemployment befall you.
However, protection insurance comes in many different forms.
As a result, deciding what's right for you can quickly get confusing.
Here, I explain four options you might want to consider.
Payment protection insurance
What is it? Payment protection insurance (PPI) is designed cover your monthly loan or credit card repayments if you are unable to meet them because of an accident, illness or unemployment. This is why it's sometimes known as ASU insurance. Some PPI policies will also cover your mortgage repayments in the event you cannot make them. These policies may be referred to as MPPI (mortgage payment protection insurance).
Is it worth it? PPI policies often come with a long list of exclusions. If you're self-employed, retired or have an existing medical condition then you're unlikely to be covered.
PPI policies usually pay out for a set period of time - usually between 12 and 24 months. Therefore, if you take out PPI, you must consider what you'll do after your policy expires.
PPI only protects the portion of your income that you owe someone else. It will not pay out money for you to live on while you're unable to work.
The mis-selling of PPI has been all over the news in the past few months. Therefore, if you do decide you need PPI, it's important to shop around for an affordable deal.
Critical illness cover
What is it? Critical illness cover (CIC) is designed to pay out a tax-free lump sum in the event you're diagnosed with an illness or medical condition specifically covered by your policy.
Is it worth it? CIC will generally cover ‘core' conditions such as heart attacks, strokes, kidney failure and cancer.
However, all policies vary and certain exclusions are likely to apply.
For example, you may not be able to claim if your injury or illness is the result of a criminal act, is self-inflicted or if your condition does not severely affect your lifestyle.
One advantage of CIC is that there are no restrictions on how you can use any payout you receive.
However, a critical illness insurance policy will only pay out once, and will not replace a regular income.
Income protection insurance
What is it? Income protection insurance (IPI) will pay you a regular sum designed to replace your usual income if you're unable to work as a result of illness or injury. It's sometimes known as permanent health insurance (PHI).
Is it worth it? If you have to make a claim, IPI will pay you a proportion of your usual income for however long you're out of work.
This means that if you're never able to return to work, your policy should pay out until you reach retirement age. However, there is usually a maximum benefit that claimants can receive each month.
The level of cover on offer from any IPI policy will depend on how much you're willing and able to spend on your premiums.
For example, IPI policies come with ‘waiting periods' which require claimants to wait for a set period before their insurance will begin paying out. If you opt for a longer waiting period, you're likely to pay less for your premiums.
It's important to check whether your IPI policy will cover you if you're unable to do your own job or if you are unable to do any job. Some policies will only pay out if you are unable to work in any capacity - which may not provide enough cover for you.
Life insurance
Finally, even if you don't have protection insurance that will cover your income while you're alive, if you have a family and financial dependents you really should have a life insurance policy.
This will protect your pay packet - and your family's lifestyle - in the event of your death.
If you have a joint mortgage, additional non-mortgage debts or child care expenses, life insurance will ensure your family is not left in financial hardship should you pass away.
Even if you're a stay at home mum or dad, you should still consider insuring your life. The cost of paying someone else to cook, clean and care for your children could soon add up if you weren't there to do it for free.
Finally, remember: regardless of what type of protection you think you need, it is always a good idea to seek advice.
In addition, always read the terms and conditions of any insurance policy carefully before signing on the dotted line.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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