Protection is an essential part of your financial plan as it ensures that you can still meet your financial goals, no matter what life throws at you.
Life insurance, for instance, acts as a safety net for your family when you are gone. Income protection and critical illness cover may be equally as important because they could help you maintain your income if you are unable to work due to an illness or serious injury.
Consequently, you can still meet financial obligations like paying the mortgage, and you can also continue contributing to pensions, savings, and investments so you are still able to fund your lifestyle in retirement.
Yet, many people underestimate the importance of protection earlier in their life and think that it is only necessary when they are older and may be more likely to experience health issues.
Unfortunately, this means that many people do not have adequate protection in place.
For example, according to IFA Magazine, 48% of adults aged between 18 and 40 do not have life insurance. Without the right protection in place, you may be more vulnerable to financial shocks, regardless of your age.
Read on to learn why protection is so important at every stage of your financial plan.
Your financial responsibilities will likely increase in your 20s and 30s
Many people in their 20s and 30s assume that they don’t need protection because they are in good health. As such, they may feel that they are paying for something that they won’t use until they are older.
Indeed, as reported by the Actuarial Post, 31% of couples admit to prioritising Netflix or gym subscriptions over life insurance.
However, you could become ill or sustain an injury at any time, and if you don’t have the right protection in place, you could face serious financial difficulty. It may be especially important to start thinking about this in your 20s and 30s because your financial responsibilities could be more likely to increase.
According to Uswitch, for example, the average age that people purchased their first home in 2021/2022 was 34.
Additionally, the Office for National Statistics (ONS) reports that the average age of mothers giving birth in England was 30.9 years, and the average age of fathers was 33.7 years.
As a result, you may need to make sure that you have adequate protection that can cover the cost of your mortgage and childcare expenses should something happen to you.
It is also important to note that the cost of protection is likely to be much lower at this age. Typically, providers calculate the premiums based on your age, health, and lifestyle.
If you are relatively young and healthy, your premiums will likely be lower. As the cost is normally locked in at the point of purchase, this could mean that protection is more affordable now and later in life.
Conversely, if you wait until you are older and more likely to have health problems, protection could be more expensive.
Your 40s and 50s are a crucial period for contributing to your retirement savings
During your 40s and 50s, you may still have many of the same financial responsibilities that you did earlier in life, such as your mortgage, for example.
Additionally, while your children could have moved out, you may still need to offer some financial support. You may also need to care for your ageing parents and absorb some of the associated costs too, so protection often remains as beneficial as ever.
To add to this, you may experience more health issues as you get older, meaning you may be more likely to rely on protection if you are unable to work.
It is important that you have a safety net in place if this does happen because your 40s and 50s are vital retirement saving years. If your income reduces and you can no longer afford to make pension contributions, you may not be able to reach your savings goals. This could mean making sacrifices to your lifestyle in retirement.
Figures from Royal London demonstrate the effect that even a short break in pension contributions could have on your retirement savings. They calculated that somebody earning £70,000 a year making an 8% pension contribution would pay £12,192 less into their retirement savings if they stopped their contributions for one year.
More importantly, in 20 years’ time, their pension pot could be an estimated £31,508 smaller as a result of that one-year break because they have missed out on potential growth. This figure is based on assumed growth of 5% each year.
As you get closer to retirement, you have less time to make up any shortfall in your savings. Fortunately, if you have the right protection in place, you should not need to pause your pension contributions, even if you are unable to work.
Protection could help you cover expensive care costs in later life
When you reach your 60s and beyond, your financial obligations may change. You are more likely to have paid off your mortgage, for example, and your children may be less likely to be financially dependent on you.
However, there are other potential expenses to consider, including care costs. As you get older, you may require assistance at home or, in some cases, you may need to move into a full-time care facility.
According to Which?, the average weekly cost of a residential care home in the UK in 2022/2023 is £800 – an increase of 19.05% on the previous year.
The right protection could help you manage this expense. For example, if you suffered a stroke or serious heart attack and required care, a critical illness payout may cover the cost. Additionally, critical illness cover often protects you if you are diagnosed with dementia or Alzheimer’s disease.
This could mean you don’t need to rely on your other retirement savings or sell your home to pay for care. That said, you may need to check to see exactly what cover you have because each insurer has their own definition of a critical illness.
Additionally, when you pass away, your family may be able to use a life insurance payout to pay an Inheritance Tax (IHT) bill and clear any debts on your estate. As a result, you may be able to pass on more of your wealth to your loved ones.
To achieve this, it is important to write your life insurance in trust. This may ensure that it falls outside your estate when calculating IHT. However, trusts can be difficult to navigate so it may be beneficial to seek advice here.
Get in touch
Protection is an essential safety net that allows you to work towards your long-term goals no matter what happens.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help you explore your protection options today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Note that protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.