Critical Illness insurance offers financial support by paying out a lump sum in the event of the policyholder being diagnosed with a specified illness. The lump sum can be used to cover treatment costs, living expenses, or any other financial need.

Term life insurance pays a lump sum if the policyholder dies during the term of the policy (normally up to the anticipated retirement age). The payout can be used to pay off an outstanding mortgage and/or provide a lump sum to another person (usually a spouse or partner).

Income protection provides regular financial support to people who are unable to work due to illness, injury, or disability. With this cover, policyholders receive a portion of their regular income as a replacement, usually a percentage of their pre-disability earnings, during the period they are unable to work.

Whole of life insurance plans pay out a lump sum after the death of the policyholder. Unlike a term life policy, whole of life plans cover the entire lifetime of the insured person, as long as the premiums continue to be paid. These policies are often used to cover inheritance tax liabilities – or to pay for things like funeral costs.

Which of these protection policies is right for you and your family will depend on your personal circumstances, so it’s important to talk to a financial adviser before considering them. They’ll be able to offer guidance based on your specific needs.

If you want to know where to start, my advice is to think about these four things when planning protection for you and your family.

When it comes to taking out protection and insurance policies, replacing your income should be a top priority. I call this ‘the value of your human capital’.

Right now, in the UK, if you were unable to work due to illness you can claim just £109.40 a week in Statutory Sick Pay (2023/24), for a maximum of 28 weeks. For most people, that amount will barely make a dent in their regular outgoings.

There’s a common misconception that protection policies are only necessary if you have a family relying on your income. But single people also need to think about what would happen to them if they couldn’t work for an extended period of time. Regardless of your marital status, taking out an income protection policy that will replace your lost income is essential.

Another important benefit of income protection insurance is that as long as the policy remains active, you can claim on it as many times as you need to. This can be really helpful if you’re diagnosed with a condition or illness that requires you to take time off work for treatment at different times in your life.

Financial planners encourage clients to take out protection policies while they are young. A fit and healthy person will pose less risks to an insurance company, which means the insurance premiums will be considerably lower.

If you attempt to take out a protection policy much later in life, or when you’ve already been diagnosed with a medical condition, you’ll have to pay far more for any policies you apply for (or may have your application declined).

One misconception that deters people from taking out adequate protection is the belief that protection policies seldom pay out. This is not the case. In fact, the Association of British Insurers recently published figures showing that on average 98% of protection policies do pay out, and that people experiencing bereavement, illness and injury received a total of £6.85 billion in insurance pay-outs from both group and individual protection policies in 2022. Of the 2% of policies that didn’t pay out, this was due to people not being honest on their application forms.

Although people often apply for protection policies directly with insurance companies, it always makes sense to talk to a professional financial planner first. One of the ways we can help is to make sure that any protection policies you need are arranged as tax-efficiently as possible.

For example, we can help to make sure life insurance policies are placed into trust, which means that the amount paid out won’t be subject to inheritance tax, and payments can be released to beneficiaries much quicker.

Also, for business owners, it can be much more tax-efficient to arrange protection policies through your company, rather than taking out personal policies. Business owners can, for example, can take out Executive Income Protection and Relevant Life policies, where the premiums for the insurance are paid for by the business itself.

Setting up a lasting power of attorney (LPA) is a critical aspect of financial planning to consider because it allows people to appoint trusted individuals to make decisions on their behalf should they become incapacitated or unable to manage their affairs in the future.

There are two types of LPA in England and Wales that can be arranged:

1. Property and Financial Affairs LPA: This grants the appointed person the authority to make decisions related to the individual’s financial matters. This can include managing bank accounts, paying bills, handling investments, or selling or buying property.

2. Health and Welfare LPA: This gives the appointed person the ability to make decisions concerning the individual’s personal welfare, health, and medical treatment, as well as day-to-day living arrangements.

With one, or both, LPAs in place, you have peace of mind knowing that your affairs will be handled according to your wishes. It also means you avoid losing control over your finances or your health and wellbeing when you’re most vulnerable.

There are differences if you live in Scotland or Northern Ireland. In Scotland, you can make a similar arrangement to an LPA although the name and process differ slightly. If you live in Northern Ireland, you can only set up this type of arrangement for your finances and property, not your health.

Speak to an Amber River financial planner near you. They will be able to tell you exactly how it works in your location.

Protection policies are there to ensure your lifestyle remains protected, whatever your personal circumstances. But people’s lives and living arrangements change, so it’s important to make sure your protection policies are reviewed from time to time.

Policies may need to be updated to account for any changes to your finances and income such as changing jobs (and salaries), your marital status or changes in liabilities.

At Amber River, we help families and individuals arrange the right protection policies to suit their lives and their livelihoods.