It’s likely that 2022 could be remembered for all the wrong reasons: the start of the war in Ukraine, soaring inflation and energy prices, and the Bank of England increasing its interest rates nine times in a row.
The skyrocketing cost of living pushed inflation up to 11.1% in October 2022, the highest level for more than 40 years. While it had fallen to 10.5% by the end of the year, many households across the UK are still dealing with higher prices and the effects that’s had on their monthly outgoings.
According to Money Marketing, research reveals that one in seven UK adults are considering cancelling their life protection to help deal with the cost of living crisis. While it may sound like a good strategy, cancelling any type of financial protection could be extremely risky, and something you later bitterly regret.
Read on to discover three important reasons why cancelling your cover could jeopardise your wealth both in the short and long term. Before you do, let’s look at the different types of protection.
Research by Cancer Research UK provides a startling statistic: one in two Britons will be diagnosed with cancer at some point in their lives, which may mean that they are unable to work while they recover.
If this were to happen, having income protection could be invaluable, as it typically pays a tax-free income every month. While the amount you receive depends on your salary and the terms of your cover, it’s typically around 60% of your regular income and continues until you return to work, retire or the cover ends.
Critical illness cover (CIC) typically pays a tax-free lump sum if you’re diagnosed with, or need treatment for, a serious illness. The money could be used to:
- Pay for private medical treatment
- Repay your debts
- Modify your home if necessary
- Provide an income.
The illness you are covered for will depend on the protection you take, although CIC protection typically pays out if you have cancer, a heart attack or a stroke.
If the worst happens to you, life cover pays a lump sum to your family. This could be used to pay off the mortgage on the family home, clear outstanding debts or generate an income so that they can maintain their lifestyle without you.
Without life cover, the family home may have to be sold, or your loved ones standard of living might fall significantly.
Stopping for a short time could negate your protection
While the premiums on financial protection may feel like an expense you could do without if your household expenditure has skyrocketed, it could in fact be essential. This is because if anything were to happen to you, not having it could create a major financial headache for you and your loved ones both in the short and long term.
Let’s consider this now.
1. You are not covered if anything does happen
One of the most important things to remember with financial cover is that it is typically only in place while you pay your premiums. If you stop paying the protection ends, even if you have only stopped for a short period.
This means that if you are diagnosed with an illness or the worst happens to you, the protection provider is unlikely to pay out. Furthermore, you may not get back all of the premiums you have paid on the cover, meaning you could lose a significant amount of money.
2. You may not be able to make ends meet
If you are unable to work due to an accident or illness, not receiving money from your income protection might mean you are forced to live off savings to make ends meet. Once they run out, you may be forced to significantly reduce your standard of living, or worse still, sell the family home.
This might result in the home being sold at a particularly challenging time in life if you’re trying to recover from a serious illness. It’s worth remembering that there is no obligation for your employer to pay you while you are off work with illness, and if they don’t, Statutory Sick Pay (SSP) is just £96.35 a week (2022/23). Furthermore, it is only paid for 28 weeks.
3. It could put your long-term plans in jeopardy
One consequence of cancelling that is often overlooked is that without financial protection, you may not be able to maintain your pension contributions. This in turn could put all of your retirement plans in jeopardy, and may mean you have to delay stopping work.
Keeping your financial protection in place could help you keep your long-term plans on track, which is why cover is such an integral part of a good financial strategy. It also reduces the chances of you having to sell investments or other assets that you intended to use to provide an income later in life.
Creating a budget could help with short-term financial challenges
Working with a financial planner could provide you with alternative ways to deal with the rising cost of living without cancelling your protection policies. A planner could provide a clearer understanding of your spending habits and where you might be able to reduce your overheads to deal with any financial challenges.
Get in touch
If you are considering stopping financial protection to help with the rising cost of living, and would like to discuss your options, please contact us on email@example.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high quality service.
This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The information is aimed at retail clients only. Life insurance 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.