Protection insurance – is it worth it?

7 min read 25 Mar 24

Many people have found that they’ve had to tighten their belts in an attempt to cope with the ongoing cost-of-living challenges. So is protection insurance something that’s worth getting, and if you’ve already got it, worth keeping?

Protection can offer a financial buffer if things unfortunately take a turn for the worse. If you died or suffered a serious illness, what would happen to your family? You may have protection insurance through your employer, but is it enough?

Protection might not be right for everyone at this time, but it is definitely something worth exploring. We’re here to help if you’re interested in finding out more.

Common perceptions about protection

There are some common perceptions around protection that can sometimes cloud peoples’ decisions on the best way to protect themselves and their family’s financial future. Here are just some of them:

  • It won’t happen to me – nobody likes to think about bad things happening to them, but illness and death are an unfortunate part of life.

  • It’s too expensive – yes, it’s an additional expense, but it may not be as much as you think. The price you pay will depend on your personal circumstances, the amount of cover and how long you take it out for.

  • Insurers don’t pay out – the statistics demonstrate the opposite. Insurers paid out on 98% of all protection claims in 2022, according to the Association of British Insurers (ABI). In fact, the claims acceptance rate has remained at around 98% since 2017. View 'Protection insurers pay out £6.85 billion to support individuals and families' on abi.org.uk.

Reasons for taking out protection

People take out protection for many different reasons, including:

  • Moving house – to help cover mortgage payments or bills if they couldn’t work

  • Getting married – to provide a financial safety net for their spouse if they pass away

  • Divorce – a review of any existing plans is advised. Extra protection may need to be taken out to cover loss of income and to financially protect themselves and their dependants

  • Preparing for retirement – passing money on to loved ones and helping to reduce any inheritance tax

  • Someone approaching retirement who might outlive their partner and need financial support

  • To pay off debt. Debts including mortgages, need to be paid by an estate before any money or possessions can be passed on to family. So it could prevent the home from being sold to meet debts, even if it’s part-owned by a spouse or partner.

Types of protection

There are a number of different types of protection to cover various needs and life stages – here are some of the most common:

Type
Cover
Life insurance Life cover during a pre-agreed period of time
Group life cover Including Death in service benefits pay out a lump sum to your family or next of kin, based on a multiple of your salary usually. It isn’t offered by all employers and you must be employed at the time of your death
Critical illness Cover if you are diagnosed with certain illnesses or disabilities
Over-50 plans Cover towards funeral costs, paying debts or allows you to leave some money to loved ones if you die
Whole of life plans (life insurance) Cover for your entire life – paying off your debts or money left to a loved one if you die
Income protection Group (provided by your employer) and individual cover to help financially support you if you have time off work and suffer a loss of earnings due to injury or illness

Many policies will factor in your age, lifestyle, occupation, pre-existing and family medical history. You pay a monthly amount to the insurance company.

Life insurance

Life insurance pays out a cash lump sum in the event of your death, or in some cases, if you were diagnosed with a terminal illness. This could be especially important if you have family who depend on your income – such as children, a spouse or partner, or other relatives. They could use the money towards living expenses, debts, funeral costs, household bills or mortgage payments. It can give you peace of mind knowing it could help provide some financial support to your family if you die.

The sum paid out forms part of your estate so you may wish to consider putting it in a trust. This means that the money passes directly to your beneficiaries at the time they need it most, avoiding any potential inheritance tax liability. Trusts are a complex area so it’s important to speak to your adviser if you are considering this option.

Income protection

Income protection is designed to protect your income if you have an injury or illness and suffer a loss of earnings. This cover helps you to continue to pay your bills, rent or mortgage if you’re unable to work. Most policies have a pre-agreed waiting period – which is the waiting time between when you’re unable to work and you receive payments – and a limit on the amount you can cover yourself for.

Critical illness protection

It’s worth estimating how much you and your family need to live comfortably if you fell seriously ill. You may be covered by your employer benefits, get sick pay or be eligible for some state benefits but how far will this stretch and how long will it pay you for?

Critical illness cover pays out a cash sum if you’re diagnosed with certain illnesses or disabilities. The kinds of illnesses covered are usually long-term and very serious conditions such as stroke, organ failure, cancer, Multiple Sclerosis, Parkinson’s or Alzheimer's disease. Providers cover different conditions so it’s worth checking these – some of which are very specific, for example, a heart attack with specific symptoms. Cover may be more expensive for people with medical conditions, hazardous jobs or hobbies, depending on the provider.

Here are some examples of how critical illness could be used:

  • Home alterations such as ramps or installing a stair lift
  • Disability vehicle, or alterations to the car
  • Replacing a company car
  • Short term nursing care costs

Concerned about leaving your family to pay for your funeral costs?

The national average cost of a funeral is currently £4,000 according to Legacy of Lives, a free online funeral comparison site designed to help people through the process of funeral-planning. They believe that ‘for almost 1 in 8 families, finding the money to pay for a loved one’s funeral caused them notable financial problems’.1

Some people choose to take care of their funeral costs as part of their estate planning – to help take the financial burden from their children. Richard Adamson, a financial adviser with M&G Wealth Advice, tells how he helped his clients plan for their funerals so that their children didn’t have to worry.

"I recently met with a retired couple who were concerned about their poor health. They were worried that they hadn’t made any provision for their funeral costs and didn’t want to leave their family with any financial concerns. Given their health issues we offered them both guaranteed over 50’s plans."

With an over 50’s plan you may pay more in premiums than the policy will pay out on death. You're only fully covered after you've had the plan for a specified period of time. If you stop paying premiums, the cover will end, and you won't get anything back. And inflation will reduce the amount paid out, as the amount of cover is fixed.

"The couple were pleased as the monthly cost was affordable for them and after a set period of time, it should fully cover the cost of their funerals. The money would be paid directly to the funeral provider – saving them and their families the distress of having to arrange this during a difficult time. They were really happy to get this all sorted and, more importantly, it gave them peace of mind."

1 legacyoflives.com/where-to-get-help-with-funeral-costs

Protect yourself and your family

Protecting yourself, your family and your family’s financial future is so important. So, if you’re interested in finding out more, or have any questions about the different types of cover, please get in touch with your financial adviser.

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“M&G Wealth Advice” is a trading name of M&G Wealth Advice Limited which is registered in England and Wales. Registered office at 10 Fenchurch Avenue, London EC3M 5AG. Registered number 5739054. Authorised and regulated by the Financial Conduct Authority.