How to prepare for a financial emergency

Last year The Money Charity reported that almost ten million UK households have no savings at all. Their most recent figures also show that 340 people were declared insolvent or bankrupt, and 14 properties were repossessed, every single day in the UK.

Pretty alarming statistics, but how would your family cope if you suddenly lost a primary source of income, or received a large unexpected bill? As always, preparation is key.

Ensure you have an emergency fund

Emergency fund, rainy day fund – call it what you want – but it’s essential to have readily accessible money to replace lost income or meet unforeseen costs. Between three to six months household living expenses is generally recommended, but this does, of course, depend on your personal circumstances.

Cashflow planning is a great tool to help work out your expenditure and determine your emergency fund value. More importantly, it also enables you to project your income, expenditure and wealth decades into the future. Cashflow planning can take into account regular and one-off events, both positive and negative, such as receiving a windfall or a large outlay, where your emergency fund will come in handy.

Protection, protection, protection

Some people believe that insurance providers do their best to wriggle out of paying a claim. But, latest figures from the Association of British Insurers show that in 2018 the industry paid out more than £5.3 billion – a record high. In fact, that year there were more than 200,000 claims and 97.6% of them were successful.

So, what kind of protection should you be considering? Broadly speaking, there are three types:

1. Life insurance

We’ll start with the simplest – life insurance pays a lump sum if the policyholder dies. It’s commonly used to cover outstanding mortgage debt, but there does not have to be a specific reason. In reality, you can take out as little or as much cover as you like.

You can have a term insurance policy, which will cover the policyholder for a defined period of time, or a whole of life policy, which covers the policyholder until the day they die. In both circumstances you must keep up-to-date with the premiums or the cover may be lost.

Premiums are based on a range of factors, usually including your age, health, medical history and the level and length of cover required. Last year the average term life insurance pay out in the UK was just over £81,000. More importantly, over 35,000 beneficiaries were supported following bereavement, to the tune of £2.9 billion.

2. Critical illness cover

Critical illness cover, depending on the terms of the policy, will pay either a lump sum or a regular income when the policyholder suffers a serious injury or is diagnosed with an illness, such as a heart attack or cancer.

Sadly, on average, more than 363,000 new cases of cancer are diagnosed in the UK every year according to Cancer Research. Unsurprisingly then, it was also the most common reason for a critical illness claim in 2018, accounting for 63%.

If you experience a financial emergency due to illness or injury, a critical illness policy can certainly help restore financial security until you are, hopefully, able to recover. If the diagnosis is more serious, it could afford you to live more comfortably and ultimately support your family.

3. Income protection

Like a regular paying critical illness policy, income protection is designed to help replace income when you’re unable to work due to illness or injury. It will usually cover a percentage of the policyholder’s normal income and usually continue to pay until they’re able to go back to work or retire.

On average, income protection paid out just over £22,000 a year for more than 25,000 people in 2018, but the level of protection you require might be significantly higher. If your family relies heavily on your income to support their lifestyle, income protection could benefit you significantly in unforeseen circumstances.

Do you need protection?

You’ll likely want to consider private medical and dental cover too, if these perks aren’t already provided by your employer. Then there’s buildings insurance, pet insurance, the list goes on…

However, whilst a financial planner might not be the most appropriate person to recommend insurance for the family dog, we certainly are the right people when it comes to protecting your long-term financial security.

Want to chat? Give me a call on 07769 156 250.

Leave a Reply