When you're looking at insurance,, there are a couple of other things to think about to help protect your income, which may reduce or remove the need for insurance. If you’re single, your insurance needs will also be different to those in a relationship.
You can Self-Insure with Good Financial Discipline
What does that mean? Well, by making sure you have good habits in place, the need for insurance is arguably lessened slightly. For instance, if you have an emergency fund of six months’ expenses, you don’t need income protection to pay out after just one month of being off sick.
If your expenses, which you’ve budgeted for monthly, are only 60% of your income because you’re keeping your spending under control, then you won’t need so much insurance to cover costs if you can’t work.
Good financial discipline has more benefits than just helping you save for the future, as it can actually reduce the need for insurance. However, you need to make sure you have an emergency fund, which is usually between three and six months of minimum standard outgoings, to cover your bills, mortgage and other expenses.
Work Benefits can be Valuable
If you work for someone else, you may well have some level of sickness benefit available and possibly also some life insurance. You need to know what the benefits available to you are so that you can work around them. There’s no point in taking out insurance if you’ve got good benefits at work.
If you leave that employer, you’ll lose those benefits and your next employer may not have them, so there is an argument for having your own standalone protection programme in place that you can take with you wherever you work, and your work benefits are an extra benefit.
Prioritise Protection According to Your Current Life Stage
You need to prioritise protection differently according to your life stage. Every situation is different, of course, and for as many people reading this, there that many individual needs and situations, so it’s impossible to be to definitive about this.
I’ve made a calculator which is hopefully going to help you, an Excel Sheet which you can open in Google Docs. Put in some information about your current situation and it’ll give you a steer as to what insurances you might need.
If you’re young (or old), free and single, in other words if it’s just you and you have no dependents, then you don’t really need life insurance unless you have debts. If your only debt is a mortgage then the house could be sold to pay off the mortgage and any excess will be distributed as per the terms of your will.
But, you might want to have the mortgage paid off so you can leave the house to somebody who’s important to you, maybe as an income-producing investment for them. Generally, life insurance is less of a priority than income protection. You should definitely put that first: prioritise income protection first, then life cover to pay off any debts (if you want to), then critical illness cover.
If you are still around, having suffered a pretty serious diagnosis like cancer and gone through treatment to get through that, that might take a while, and critical illness might be a real benefit for you, at least in part. Income protection is by far the biggest priority you need to consider.