As you’re progressing through life and achieving your goals, it can often feel as though nothing can stop you. 

However, the journey can be unpredictable. Unexpected events – such as illness, injury, or a loss of income – could quickly derail your financial plans if you aren’t adequately prepared. 

Financial protection is designed to support you in the event of the unthinkable. 

Despite its importance, the 2024 Financial Lives Survey from the Financial Conduct Authority found that 54% of the UK’s working population remain unprotected.

Several factors might be contributing to this “protection gap”. 

Read on to find out why it’s so vital to ensure you’re properly protected, and learn about ways to bridge the gap.

Several common misconceptions could cause the protection gap

Putting a financial safety net in place means that you’re covered for various eventualities. 

For instance, if you are suddenly diagnosed with a serious illness, you can focus on your recovery rather than worrying about money. Even if you can’t work due to other reasons, protection could help you keep up with bills.

Alternatively, should the unthinkable happen and you pass away unexpectedly, your loved ones will be able to maintain their standard of living.

However, the protection gap shows that many still lack vital cover for a variety of reasons.

You may think nothing bad will happen

It’s easy to underestimate the potential effects that an unforeseen event could have on you and your loved ones, especially when life seems to be going well.

For instance, you may believe that “this will never happen to me”.

However, according to Macmillan Cancer Support, someone is diagnosed with cancer every 90 seconds in the UK. What’s more, around 167,000 people pass away from the disease each year, equating to an average of 460 deaths every day.

Of course, it can be challenging to consider scenarios like this. Still, it’s vital to protect yourself and your finances.

You might believe you could fund an illness with your savings

You may even believe that you could rely solely on your savings to help you through a period of hardship.

Yet, Zurich reports that the cost of a cancer diagnosis often results in £9,072 a year in additional costs.

If you are suddenly diagnosed with a serious illness, you might be forced to exhaust savings intended for other purposes. 

This can quickly derail your progress towards your long-term goals.

You could think that providers try to avoid paying out

The protection gap might also be due to the belief that, should you face financial hardship, your provider will do anything to avoid paying out.

Yet, a report from the Association of British Insurers found that protection providers paid 97.9% of new individual claims, with most declined claims resulting from failures to disclose existing medical conditions. 

There are several forms of protection that could safeguard your financial and emotional wellbeing

It is understandably difficult to think ahead and plan for scenarios such as a serious illness or your passing.

Thankfully, protection can safeguard your financial and mental wellbeing during times of trouble. Here are three forms of protection to consider.

1. Income protection

If you’re unable to work due to an accident, illness, or period of redundancy, income protection could provide you with regular payments. These could help you deal with bills, such as utilities or mortgage repayments. 

Your provider will typically pay out a monthly benefit of between 50% and 70% of your pre-tax earnings, which could help you deal with essential bills, such as utilities or mortgage repayments.

Even if you never end up needing your income protection, it can still offer peace of mind knowing that you’re less likely to derail your progress towards your long-term goals if you can’t work.

2. Critical illness cover

Meanwhile, if you’re diagnosed with a serious condition, critical illness cover offers a tax-free lump sum, so long as the illness is covered by your provider.

You could use this money to fund any necessary medical treatment or adapt your home to be more disability friendly. 

It could give you some much-needed space to properly focus on your recovery without the added stress of managing your finances.

While you might believe you need one or the other, it could be wise to have a combination of both critical illness cover and income protection.

Indeed, you could use the lump sum from critical illness cover to deal with more significant costs, while the regular income protection payments could help you manage day-to-day expenses.

3. Life cover

It’s also vital to plan for what might happen if you pass away unexpectedly. Life cover means your loved ones would receive a lump sum or ongoing income to help them manage costs.

Read more: How writing whole-of-life cover into a trust could help you mitigate an Inheritance Tax bill 

They might use the payout to cover funeral costs, pay for the mortgage, or simply provide some much-needed financial support during an already emotionally challenging time. 

If you’re the main breadwinner, the payment could also be important in allowing your family to maintain their lifestyle or perhaps even stay in your home.

A financial planner can help you assess your protection needs

It’s vital to remember that your protection needs aren’t static. Your life tends to change frequently, and you might welcome a new child into the family, purchase a new home, or start a new business.

These significant life changes can mean you need more protection.

This is why it’s worth reviewing your protection needs periodically, such as once a year. Doing so can ensure that if you do face a serious, unexpected event, your protection remains adequate to see you through it.

A financial planner from Optimum Path could help here.

We can take time to evaluate your existing protection policies to assess whether they’re sufficient for your unique circumstances. 

If we do identify gaps in your cover, we can then recommend solutions tailored to your own needs.

Be sure to contact us now to find out how our Chartered financial planners can help. 

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Note that life insurance and financial 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.

The Financial Conduct Authority does not regulate estate planning.