Financial protection explained: What is it, and do you need it?

When arranging a mortgage, most of the attention naturally goes towards finding the right property, securing a mortgage and getting everything ready for moving day.

However, there's another important part of the process that's worth considering: what would happen financially if you died, became seriously ill or were unable to work?

Nobody particularly enjoys thinking about these situations, but understanding the options available means you can make an informed decision about whether you need financial protection. There are several different types of insurance designed to help, and they each serve a different purpose.

Life insurance

Life insurance is designed to provide financial support to your loved ones if you die during the term of the policy. It pays out an agreed amount of money, which could be used to repay a mortgage, cover household bills or provide financial security for those you leave behind.

For example, if you have a mortgage with your partner and one of you dies, the surviving partner could be left responsible for paying the mortgage and household expenses on their own.

Life insurance could provide the money needed to repay the mortgage, reducing the financial pressure at an already difficult time. Even if you don't have children or other financial dependants, it's worth considering whether someone else would be financially affected by your death.

Family Income Benefit

Family Income Benefit is another type of life insurance, but rather than paying out a single lump sum, it provides a regular income to your loved ones if you die during the policy term.

For example, this could help replace some of the income your family would otherwise lose, allowing them to continue meeting everyday expenses such as household bills, childcare and living costs.

It's particularly worth considering if you have children or a partner who relies on your income.

Critical illness cover

Critical illness cover is designed to pay out a lump sum if you're diagnosed with one of the serious medical conditions covered by your policy. These can include certain types of cancer, heart attacks and strokes, although exactly what's covered will depend on the insurer and the policy.

Unlike life insurance, which generally pays out when you die, critical illness cover is designed to provide financial support while you're still alive.

For example, if you were diagnosed with a serious illness, you might need to take time away from work, make changes to your home or meet additional expenses while recovering.

A critical illness payment could help you manage these costs, reduce your mortgage or provide some financial breathing space.

It's important to understand that critical illness insurance doesn't cover every illness or medical condition. A claim will only be paid if the circumstances meet the definitions and conditions set out in the policy.

Income Protection

Income protection is designed to provide a regular monthly payment if you're unable to work because of illness or injury. Rather than paying out a one-off lump sum, it replaces part of your income while you're medically unable to work, subject to the terms of the policy. This is an important distinction because you don't necessarily have to suffer a critical illness to be unable to work.

For example, a back injury, mental health condition or other illness could prevent you from working for an extended period, even though it wouldn't necessarily qualify for a critical illness payment.

Income protection can cover a much broader range of medical conditions, provided they prevent you from working under the policy's definition of incapacity. Policies usually have a waiting period before payments begin, and the length of time benefits can be paid will depend on the cover selected.

It's worth considering how long you could manage financially if your salary or self-employed income stopped, particularly if you have a mortgage and other regular commitments.

What about protection through your employer?

Some employers provide benefits such as death in service, sick pay or other insurance arrangements. These can be valuable, but it's important to understand exactly what you're entitled to.

For example, death in service benefits generally only apply while you're employed by the organisation providing them. Similarly, your employer might only pay your full salary for a limited period if you're unable to work.

If you change jobs, become self-employed or leave employment, these benefits could change or disappear altogether.

Before deciding whether you need additional protection, it's worth checking what arrangements you already have in place and whether they would be sufficient for your circumstances.

Do you need all three types of protection?

Not necessarily. Everyone's circumstances are different. Someone with children and a large mortgage might have very different priorities from someone buying on their own with substantial savings.

It's also important to recognise that the different types of protection aren't interchangeable.

• Life insurance helps protect those you leave behind if you die.

• Family income benefit can provide your family with a regular income if you die.

• Critical illness cover can provide a lump sum if you're diagnosed with a specified serious illness.

• Income protection can help replace your income if illness or injury prevents you from working.

Having one type of protection doesn't necessarily mean you're covered against the other risks. Equally, you might already have sufficient savings, employer benefits or existing insurance arrangements that reduce your need for additional cover.

What happens if you don't have protection?

There's no general requirement to take out life insurance, critical illness cover or income protection when arranging a mortgage. However, your mortgage payments and other financial commitments will still need to be met if your circumstances change.

If you die, your family or estate could be left with an outstanding mortgage.

If you become seriously ill or are unable to work, you could find yourself relying on savings, employer sick pay or state benefits to cover your regular outgoings.

Depending on your circumstances, this could mean having to reduce your expenditure, use savings intended for other purposes or potentially sell your home if you can no longer afford the mortgage.

Insurance can't prevent these events from happening, but suitable protection can help reduce their financial impact.

Making an informed decision

The purpose of reviewing financial protection isn't to suggest that everyone needs every type of insurance. It's to help you understand the risks, what cover is available, what protection you may already have and whether there are any gaps worth addressing.

We can look at your personal circumstances, existing arrangements and budget before discussing which options, if any, might be appropriate. You might decide to arrange comprehensive protection, prioritise certain risks or choose not to take out any additional insurance.

Ultimately, the decision is yours. What's important is that you understand the potential financial consequences of being uninsured and have had the opportunity to consider your options.

If you haven't yet had a protection review, please get in touch so we can arrange a convenient time to discuss your circumstances.

Insurance policies are subject to their terms, conditions, exclusions and eligibility requirements. Claims are not guaranteed, and the cover available will depend on your individual circumstances.