By Sarah Williams June 1, 2025
Life is unpredictable. While we can’t control what happens to us, we can take steps to protect our families financially when the unexpected occurs. Protection insurance provides a safety net that ensures your loved ones can maintain their lifestyle and meet their financial commitments, even if you’re no longer able to provide for them.
Why Protection Insurance Matters
Despite its importance, protection insurance is often overlooked in financial planning. Many people assume they’re covered through work or that “it won’t happen to them.” However, the statistics paint a sobering picture:
- 1 in 4 people will suffer a critical illness before retirement age
- The average mortgage term is 25 years – a long time to rely on continued health and employment
- Statutory sick pay provides minimal support compared to most people’s financial commitments
Protection insurance bridges the gap between what the state provides and what your family actually needs.
Types of Protection Insurance
1. Life Insurance
Life insurance pays out a lump sum if you die during the policy term. There are two main types:
Term Life Insurance: Provides cover for a specific period (e.g., until your mortgage is paid off or children become financially independent). It’s typically the most cost-effective option for young families.
Whole of Life Insurance: Provides lifelong cover and can include an investment element. More expensive but guarantees a payout whenever death occurs.
Key Considerations:
- Level term vs decreasing term (matches reducing mortgage balance)
- Joint life vs single life policies
- Whether to include terminal illness cover
2. Critical Illness Cover
Pays out a lump sum if you’re diagnosed with a specified serious illness such as cancer, heart attack, or stroke. This can help with:
- Mortgage payments and other debts
- Medical treatment and care costs
- Home modifications if needed
- Maintaining family lifestyle during recovery
Important Features:
- Total permanent disability cover
- Partial payment for less severe conditions
- Children’s cover included
- Increasing cover to protect against inflation
3. Income Protection Insurance
Replaces a percentage of your income if you’re unable to work due to illness or injury. Unlike critical illness cover, which pays a lump sum for specific conditions, income protection provides ongoing monthly payments for any condition that prevents you from working.
Key Benefits:
- Usually covers 50-70% of gross income
- Payments continue until you return to work, retire, or the policy ends
- Covers both physical and mental health conditions
- Can include increasing payments to combat inflation
Types Available:
- Short-term Income Protection: Typically covers up to 2 years
- Long-term Income Protection: Can cover until retirement age
- Unemployment Cover: Some policies include redundancy protection
4. Family Income Benefit
A type of life insurance that pays a regular monthly income rather than a lump sum. This can be more suitable for ongoing expenses like mortgages and living costs, and is often more affordable than equivalent level term cover.
How Much Cover Do You Need?
Life Insurance Calculation
Consider your family’s financial needs:
- Outstanding mortgage balance
- Other debts and loans
- Children’s education costs
- Family living expenses for several years
- Funeral costs
A common rule of thumb is 10 times your annual salary, but individual circumstances vary significantly.
Income Protection Calculation
Most insurers limit cover to 50-70% of your gross income. Consider:
- Essential monthly expenses
- Existing sick pay entitlements
- Other sources of income
- State benefits available
Critical Illness Cover
Often linked to mortgage balance or set at a multiple of salary. Consider:
- Immediate financial pressures if unable to work
- Potential medical and care costs
- Home modification requirements
Common Myths About Protection Insurance
“It’s Too Expensive”
Protection insurance is often more affordable than people think. A healthy 30-year-old non-smoker might pay £20-30 per month for substantial life and critical illness cover.
“I’m Covered at Work”
Employer benefits are often limited and may not continue if you change jobs. They rarely provide comprehensive family protection.
“I Can Self-Insure”
Few people have sufficient savings to replace years of income or provide for their family’s long-term needs.
“I Won’t Be Accepted”
Most people can get cover, though pre-existing conditions may affect terms or premiums.
Factors Affecting Premiums
Personal Factors
- Age (premiums increase with age)
- Health and medical history
- Smoking status
- Occupation and hobbies
- Lifestyle factors
Policy Features
- Sum assured and benefit period
- Type of cover (e.g., reviewable vs guaranteed premiums)
- Additional features and riders
- Waiver of premium options
Tax Considerations
- Life Insurance: Payouts are generally tax-free to beneficiaries
- Critical Illness: Lump sum payments are typically tax-free
- Income Protection: Benefits are usually subject to income tax
- Premiums: Generally paid from after-tax income (except some employer schemes)
Choosing the Right Provider
When selecting protection insurance, consider:
Financial Strength
Choose insurers with strong credit ratings and claims-paying ability.
Claims Experience
Look at claims statistics and customer reviews for claims handling.
Policy Features
Compare definitions, exclusions, and additional benefits.
Premium Structure
Understand whether premiums are guaranteed or reviewable.
The Application Process
Medical Underwriting
Insurers assess your health through:
- Application questionnaires
- Medical examinations (for larger sums)
- GP reports
- Specialist reports if required
Disclosure Requirements
You must disclose all material facts accurately. Non-disclosure can void your policy.
Occupation and Lifestyle Questions
Some occupations and hobbies may affect terms or require additional premiums.
When to Review Your Cover
Protection needs change over time. Review your cover when:
- Getting married or divorced
- Having children
- Buying a house or moving
- Changing jobs
- Significant salary changes
- Children becoming financially independent
Common Mistakes to Avoid
Insufficient Cover
Underestimating your family’s financial needs can leave them vulnerable.
Wrong Type of Cover
Choosing inappropriate cover types for your circumstances.
Delaying Purchase
Premiums increase with age and health issues may develop.
Not Reading Terms
Understanding policy definitions and exclusions is crucial.
Forgetting About Inflation
Fixed benefits lose purchasing power over time.
Taking Action
Protection insurance planning should be tailored to your specific circumstances. Consider:
- Assessing your current financial protection gaps
- Calculating appropriate cover levels for your family
- Comparing different types of protection insurance
- Getting quotes from multiple providers
- Seeking professional advice to ensure optimal coverage
Remember, the cost of not having protection insurance could be far greater than the cost of premiums.
Conclusion
Protection insurance isn’t just about preparing for the worst – it’s about peace of mind and ensuring your family’s financial security regardless of what life throws at you. While no one likes to think about illness or death, taking action to protect your family’s future is one of the most important financial decisions you can make.
The key is finding the right balance of cover that protects your family adequately while remaining affordable. With proper planning and professional guidance, you can create a safety net that gives you confidence in your family’s financial future.
Confused about protection insurance options? Our independent financial advisers can assess your specific needs and recommend appropriate cover from across the whole market. Contact us today for a no-obligation consultation to discuss protecting what matters most to you.