When the Budget Won’t Cover Everything

When you start looking at protection insurance, there can be quite a lot to think about. Life insurance, critical illness cover and income protection can all provide valuable financial support, but they do different things.

Ideally, you might want to have all three in place. However, the reality is that not everyone has the budget to cover everything they would like to protect.

One of the biggest issues that we see is people trying to figure out which insurance should be a priority.

So, what do you do when you cannot afford all the insurance you need?

The answer is to look at your circumstances, understand where the biggest financial risks are and prioritise the cover that matters most to you. This will not be the same for everyone, as your needs can change depending on whether you are buying a home, starting a family, living alone or supporting someone who relies on you financially.

Let’s look at some of the situations where you might need to make these decisions.

What are the main types of protection insurance?

Before deciding what to prioritise, it helps to understand what each type of insurance is designed to do.

Life insurance

Life insurance pays out a lump sum if you pass away during the term of your policy, subject to the policy terms and conditions. It can help

• your family repay a mortgage
• cover household bills
• your family maintain their standard of living without your income
• pay off inheritance tax

There are lots of ways to build life insurance policies to match your specific needs. There is decreasing, level and increasing cover, then you have term and whole of life too as the most common ones.

Most life insurance policies in the UK come with an initial 12 month exclusion for claims relating to self harm and suicide. It is unusual for there to be any other exclusions and these are more likely with specialist insurers.

Life insurance is about giving someone else financial support.

Critical illness cover

Critical illness cover pays out a lump sum if you are diagnosed with a condition covered by your policy and meet the insurer’s definition. The most claimed conditions are cancer, heart attack and stroke. It can provide 

• money to help pay off your mortgage
• money to help with household costs and adaptations
• support for other expenses while you focus on your health

Basically you can do whatever you want with the money, you could even say ‘right that’s it I’m off’ and go on a world cruise if you like. Critical illness cover is complicated as there are often at least four options per insurer, you can get core and enhanced cover, include children or not and then each insurer often has a slightly different list of conditions you can claim.

Not only are the conditions listed different, but some of the specific definitions are too. As an example, a couple of insurers offer claims if you are diagnosed with a heart attack, while everyone else is heart attack of a specified severity. That’s quite a difference when it comes to medical diagnosis and claims potential.

Critical illness cover is usually focused upon giving yourself financial support.

Income protection

Income protection is designed to replace part of your income if you cannot work because of illness or injury, subject to the policy terms and conditions.  Now if critical illness cover feels like a never ending list of potential options, income protection laughs in the face of this and presents ten times more. Income protection can be used to

• cover your mortgage repayments or rent
• pay your bills
• maintain your standard of living
• keep funding into your savings, investments and pensions

Depending on the policy you choose, payments may continue for a limited period or until you reach retirement age. Each type of cover addresses a different financial risk. That is why it is important to think about what would happen if something went wrong, rather than simply choosing the cheapest policy.

Income protection is all about giving yourself financial support and security for the future.

If you are buying a home, what should you prioritise?

Buying a home is one of the biggest financial commitments many of us will make. You might have spent years saving for a deposit, finding the right property and working out what you can afford each month.

But have you thought about what would happen if you could no longer earn an income?

Your mortgage repayments would not disappear if you became too ill to work. You would still need to pay your mortgage, bills, food costs and other household expenses.

For this reason, income protection can be a particularly important consideration for people who rely on their earnings to keep their home.

If your income stopped, how long could you manage using savings alone? Would your employer provide sick pay, and for how long? Would you be able to maintain your mortgage repayments if your income dropped significantly?

At the time of writing this blog statutory sick pay is £123.25 per week, for 28 weeks. That’s £3,451 to live off, in total, for 6 and a half months. If you can’t afford to live off that, then it’s worth looking into options for income protection.

Life insurance is also worth considering, primarily if you have a partner or children who would struggle financially if you passed away. The life insurance could be used to repay the mortgage and give your family more financial security.

If you live alone and have no dependants, then from an advice point of view, life insurance is a low priority. Income protection and critical illness cover are generally going to be far more useful to you.

There is no single answer that works for everyone. The important thing is to consider both the risk of losing your income and the risk of losing your life, then work out what you can reasonably afford to protect.

If you are starting a family, should life insurance come first?

Having children can change the way you think about money and financial security.

You might be thinking about your mortgage, childcare costs, school expenses and how you will save for your children’s future. You may also be planning to reduce your working hours or take parental leave.

At this stage of life, life insurance can be particularly important. If you passed away, the money could help your family manage financially without your income and could provide funds to repay a mortgage or cover future living costs. You might want to replace your income to the household until your children are independent, so that you know that their food, out of school clubs, university fees and more are covered.

You might want to consider family income benefit for this – yes, I know it says income, but it’s a life insurance policy. I know, it would have been better if the insurance world hadn’t named it this, but here we are. With this type of life insurance it is agreed that a regular monthly or yearly amount is paid to your loved ones, for a set period of time. 

Life insurance is usually the cover that people automatically think of when they start a family. However, it is also important to consider what would happen if you were alive but unable to work because of illness or injury. Yes, it’s important to consider the financial security of your family if you pass, but, for most people it is far more likely that you will become ill and unable to work, rather than pass away before retirement.

Income protection could help you continue paying the bills and supporting your children if you lost your earnings. Critical illness cover could provide a lump sum if you developed a condition covered by the policy.

Ideally, you would look at all these options. If your budget does not allow for everything, think about which financial consequences would be hardest for your family to manage.

For most people income protection is probably the most important insurance policy they could purchase, yet it is often arranged far less than life insurance and critical illness cover.

You do not necessarily have to arrange the highest possible amount of every type of cover immediately. It may be more practical to start with the protection that addresses your most pressing needs, then review your options as your circumstances and budget change.

What if you are single and have no children?

Income protection will often be the main priority in terms of what you need, particularly if you have limited savings or would struggle to manage on your employer’s sick pay. A key thing here is that from an advice point of view this is likely what you ‘need’, but that can be very different from what you ‘want’.

Critical illness cover may also be worth considering. If you were diagnosed with a covered condition, a lump sum could give you more flexibility over how you manage your finances while dealing with your health. If you don’t want income protection due to the cost of possible exclusions, you might choose to take out critical illness cover, that will give you the chance to take a leave of absence from work if you make a successful claim. This will give you time to focus upon you and your health, rather than worrying about staying at work.

Life insurance from an advice point of view, is probably going to be a low priority. But, we also speak to people in this situation who have a health condition that means they will probably find it more difficult to get life insurance in the future, as their health progresses. They decide to put life insurance in place now and lock in the price, as they do plan starting a family in the future, and want the security of knowing that they have cover in place. Others decide they want it so that their mortgage can be paid off and nieces or nephews can inherit their home.

The key is to avoid assuming that you need a particular policy simply because other people in a similar situation have it. Equally, do not rule out a type of cover without thinking about what it could do for you.

What if you can only afford a basic level of cover?

Sometimes, you can see all the different options for insurance and it can be overwhelming, so you just step away from all of it. You may also find that it feels too expensive to have everything and you just don’t know what is best to do. Usually, its a good idea to still get the different insurances that you have looked at, but maybe tweak them a little bit so the price feels right to you.

For example, you might be able to insure a smaller proportion of your income, choose a different income protection deferred period or start with a lower amount of life insurance.

The right options will depend on the insurer, the policy and your circumstances.

With income protection, the deferred period is particularly important. This is the period you must wait after being unable to work before the policy can start paying out. A longer deferred period can reduce the cost of cover, but you need to be confident that you could manage financially during the wait. Take note of what I have put about about statutory sick pay!

Your employer’s sick pay and your savings can make a difference here. If you receive six months of full or partial sick pay, you will probably consider a different deferred period from someone who would receive very little support from work. 

With life insurance, you could consider how much money your family would actually need, rather than automatically choosing a large lump sum. The amount required to repay a mortgage may be different from the amount needed to replace an income or support children until they become financially independent.

A lower level of cover may not solve every problem, but it could still provide useful support.

Should you choose life insurance over critical illness cover?

This is a question we are often asked, and there is no universal answer.

Life insurance and critical illness cover address different risks. Life insurance can provide financial support if you pass away, while critical illness cover can provide a lump sum following a diagnosis of a critical condition that meets the policy definition.

If your main concern is making sure your family can repay the mortgage if you pass away, life insurance may be the most direct starting point.

If you are concerned about how you would manage financially whilst you are facing a critical illness diagnosis, then critical illness cover may be an important consideration.

It is also worth understanding that critical illness cover can be arranged in different ways. Some policies combine it with life insurance, while others provide critical illness cover on its own. The policy structure and terms matter, so it is important to understand what would happen if you made a claim.

Standalone critical illness cover typically requires you to survive for a specified period after diagnosis for a claim to be paid.  As an example, let’s say you have a heart attack on a Monday and pass away on the Friday. Most standalone critical illness policies will not payout a claim if this happens. If you have combined critical illness and life insurance, the life insurance element may provide a death benefit if you pass away instead, subject to the policy terms.

This is one reason why it is useful to look at how policies work together, rather than comparing their monthly premiums in isolation.

Do not forget about the cover you already have through work

Before deciding what you can afford personally, check what protection you already receive.

Your employer might provide life insurance through a death in service benefit, sick pay or other benefits. These could affect the amount and type of personal cover you need.

However, it is important to understand the details.

For example, how much death in service cover do you receive? Is it linked to your salary or pension? How long would your employer pay you if you were unable to work e.g. a maximum 2 or 5 years? Are the benefits contractual, and what would happen if you changed jobs?

Workplace benefits can be valuable, but they may change when your employment circumstances change. 

It is worth thinking about what would happen if you left your job and your benefits changed or stopped. Personal cover may offer a different type of security, depending on the policy.

Do not cancel existing cover simply because you have received a new workplace benefit without first checking what you would be giving up.

What if you are supporting someone else financially?

Not all financial responsibilities involve a mortgage or young children.

You might be supporting an adult child who needs ongoing help, a vulnerable family member or an ageing parent. Perhaps someone relies on your income to pay for care, accommodation or other essential support.

If something happened to you, the financial impact could extend well beyond your immediate household.

Life insurance could provide money to help meet those needs if you passed away. Income protection could be important too, because your ability to work may be what allows you to provide that support in the first place.

This is a good example of why insurance priorities should be based on your individual circumstances. Two people with similar salaries and mortgages could have very different protection needs because of the people who rely on them.

What if your circumstances change?

Your insurance needs are not fixed for life.

You might buy a home, have a child, separate from a partner, change jobs or take on new financial responsibilities. You may also receive a pay rise, build up savings or find that your employer provides different benefits.

Each of these changes could affect the type and amount of cover that makes sense for you.

For example, if you change jobs and lose a valuable sick pay arrangement, you may want to review your income protection. If your mortgage increases, you may want to check whether your existing life insurance is still enough.

Some policies include guaranteed insurability options, which may allow you to increase your cover after certain life events without further medical underwriting, provided you meet the insurer’s conditions and deadlines. These options are not available on every policy, so check your policy wording before relying on them.

You may not need to replace an existing policy just because your circumstances have changed. Depending on your health, the terms of your current cover and the options available, keeping your policy and adding extra cover could be more appropriate.

Reviewing your protection regularly can help you understand whether your cover still fits your needs and budget.

What if you cannot afford any protection insurance right now?

If money is tight, it can be difficult to think about paying for insurance when you have everyday bills to manage.

You should not feel pressured into buying cover that you cannot afford to maintain. Sometimes policies become unaffordable and have to be cancelled. Before taking this step, see if your insurer will offer you a premium holiday, to help you for a little bit.

You may find that a smaller amount of cover, a different policy structure or a different combination of benefits is worth considering. Insurers are generally quite happy to reduce the amount of insurance that you have taken out on a policy, but bear in mind that they don’t generally like to increase it.

The aim is to make an informed decision about what you can protect within your budget.

So, which insurance should you prioritise?

There is no single answer that applies to everyone.

If you are buying a home and rely on your salary to make the repayments, income protection could be a key priority, alongside life insurance where appropriate.

If you have children or a partner who depends on your income, life insurance may be particularly important. Income protection and critical illness cover may also help protect your family’s financial stability if you become ill.

If you are single with no financial dependants, protecting your ability to earn an income, and support if you are critically ill, are probably going to take priority..

If you support a vulnerable relative or an adult child, you may need to think about how your financial support could continue if you were no longer there or could not work.

These are starting points, not rules. Your health, existing benefits, savings, financial responsibilities and personal preferences all matter.

The most important thing is to understand what each policy does, what it does not cover and how it fits into your wider financial situation.

How Cura can help

At Cura, we understand that not everyone has the budget to put every type of protection insurance in place at once.

Our role is to help you understand the options available, look at your circumstances and identify the cover that could be most appropriate for you. That includes considering your existing policies, your financial responsibilities and the risks you are most concerned about.

You do not have to work everything out on your own, and you do not need to assume that the most expensive option is automatically the best one.

If you would like help working out what protection insurance could make sense for your situation, get in touch with Cura. We can talk through your needs and explore the options available within your budget.