Protect Your Income

How long could you last financially if you were unable to work for any reason—perhaps because you became ill or were injured, or you had to care for a disabled loved one? The sobering fact is that the average family in the UK has enough savings and spare cash to last just 18 days*.

As interest rates and other costs continue to rise, household finances are stretched to the limit and many families would be unable to meet their obligations if their primary income source was lost. How can you protect yourself and your family from economic disaster?

Insurance

A number of insurance products designed to protect income are available in the UK. Critical illness insurance is by far the most popular. It typically pays a tax-free lump sum upon diagnosis of a serious illness, such as cancer, multiple sclerosis, kidney failure, stroke, and heart attack. Be sure to read the policy carefully to determine what is covered and what is excluded. Critical illness policies generally exclude things such as aviation accidents, criminal acts, failure to follow medical advice, hazardous pastimes, and acts of war.

Income protection, or income replacement, insurance covers a wider range of disabling health issues. Instead of a lump sum, these policies make regular payments when you are unable to work. However, the policies vary—some will pay if you are unable to do your job while others pay only if you are unable to do any job at all. As with critical illness coverage, be sure you completely understand what the policy does and does not cover. It's a good idea to seek independent financial advice before purchasing this type of coverage.

Generate passive income

The best way to protect yourself and your family if you should become unable to work for any reason is to build an investment portfolio of property, stock, and other income-producing products that will pay regardless of your circumstances.

Once you have created your portfolio, it remains an independent benefiting asset; it's yours, you control it, and you (rather than an insurer) decide if you meet the criteria to be awarded funds from it. It can provide a lump sum or regular cash flow, or both, depending on your needs and your own choice. Building a portfolio of your own investments will also save you from paying monthly insurance premiums—premiums that you don't get back if you don't use the insurance.

It may seem easier to opt for insurance because all you have to do is talk to an agent, sign some forms, and pay your premiums. Profitable property investing is not easy, it will take longer, and you will have to work at it. You'll need to educate yourself and your family to make investing work for you. But if done correctly, in the end having a solid investment portfolio will provide the control, flexibility, support, and safety to be sure that your financial future, and that of your loved ones, is truly protected.

*The Sunday Telegraph, July 1, 2007

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