5 reasons why protection insurance is so important

Protection insurance

March 22, 2021

Whilst car insurance and home insurance (if you have a mortgage) are compulsory, many of us complacently consider protection insurance unnecessary or unworthwhile, but with all the economic uncertainty in 2020 and 2021, fuelled by the Covid-19 pandemic and job losses, income protection, critical illness and life insurance policies are becoming increasingly popular as more and more people consider protecting their loved ones should the worst happen.

Historically, consumers have been sceptical and distrustful of protection insurance.

However, according to figures released by the Association of British Insurers (ABI) and Group Risk Development (GRiD), protection insurers paid out 98.3% of claims amounting to more than £5.7 billion in 2019, which should more than reassure those who are doubtful as to whether insurers actually pay out or not.

The three main types of protection insurance

Life insurance

Life insurance typically pays out a lump sum compensation payment to your loved ones if you pass away before the expiration of the policy ‘term’ to protect your family from financial devastation. 

As well as policies such as whole of life cover or level term life insurance, many property owners also like the cover afforded by mortgage insurance (also known as decreasing term life insurance), which is a common policy bought by homeowners.

This type of insurance cover and its premiums decrease in line with the depletion of your mortgage. Decreasing term life insurance is not suitable for interest-only mortgages where you pay a lump sum at the end of the mortgage. For more information, read our related guide: mortgage payment protection insurance explained.

You might like: Level term vs decreasing term life insurance

Income protection insurance

Income protection insurance is a specific policy designed to provide cover if you cannot work due to sickness or lose your income due to unemployment.

It pays 65% of your untaxed salary (just like you would normally receive a monthly salary) direct to your bank account by monthly instalments.

Read more: What is income protection insurance?

Critical illness cover

Critical illness cover offers financial protection if you’re diagnosed with a serious illness or a condition specified as included and covered under the terms of an insurance policy.

Unlike income protection, it pays out one large lump sum instead of smaller monthly instalments.

Learn more: A guide to critical illness cover

5 reasons why protection insurance is important

The top five reasons why protection insurance is important are:

1. Financial security

If you lose your job, fall ill, have an accident or worse still, die, then protection insurance can ensure you do not lose your home or run up debts and it enables you (or your loved ones) to meet most, if not all, of your financial liabilities.

2. Peace of mind

You can sleep soundly at night and be anxiety-free knowing that if the worst should happen, then you’ve got every eventuality covered by insurance.

3. Protects your family

If you have financial dependants (i.e. children or a long-term partner) who rely heavily on your income, then these types of insurance policies can help look after your loved ones should you be unable to.

4. Debt prevention

Job loss, inability to work or sudden death could leave your loved ones unable to afford to pay the bills, mortgage or rent.

Protection insurance can protect your children, family or any other dependants from falling into serious, unmanageable debt that could lead to assets being seized by bailiffs or your home being repossessed.

5. Death liabilities

Life insurance can provide financial help to pay for funeral costs or a lump sum payment to your dependants to help them cope financially on your death and also helps to avoid hefty inheritance tax liabilities.

What does income protection cover?

Income protection cover provides a monthly payment covering 65% of your untaxed income if you’re unable to work due to:

  • Job redundancy
  • Physical or mental illness
  • An accident

Due to a heady, toxic combination wrought by the covid-19 pandemic and Brexit hitting many UK businesses hard, job security is currently at an all-time low. If there is financial instability in your job sector, then we strongly recommend taking out income protection cover for peace of mind, sooner rather than later.

Will I be covered for coronavirus-related problems?

If you had an active protection insurance policy in place prior to the coronavirus pandemic outbreak then you should still be covered for coronavirus related problems. To be 100% certain, you should check with your insurance provider that should you fall seriously ill or die from Covid-19, that your insurance will definitely pay out - it should do.

However, if you’re reading this blog because you’re contemplating taking out protective insurance cover, some insurance companies have recently added Covid-19 exclusions to their policies, so you should shop around until you find an insurance provider that provides full coverage and who will pay out in the event you contract coronavirus. Or better still, use an insurance broker.

Is it worth getting protection insurance?

Yes, protection insurance is most definitely worth getting, especially if you have any financial dependants such as children, a long-term partner or family members that depend on you financially and who would struggle to pay bills, debts, mortgages, rent or any other financial liabilities, in the event that you lose your income or pass away.

To find the best deal and most appropriate insurance for your circumstances and general help with your late-life planning, we recommend using an insurance broker. You can find out more about this in our guide to keeping the cost of life insurance down.

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