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How to protect yourself from (almost) every financial disaster
Setting up a safety net helps take some of the stress out of redundancy, illness or divorce
It’s all too easy to take your income and the roof over your head for granted. But if disaster strikes and you’ve not got a safety net, it may not take long for your financial position to start feeling a bit precarious.
The loss of a job or an illness can put pressure on your household finances – but taking certain steps can take all the stress out of these eventualities, and mean your mortgage payments don’t need to suffer.
With the British economy on unsteady footing – being affected by geopolitical tensions, possible Trump tariffs and many employers feeling the effects of increased National Insurance contributions – it may be a good time to make a plan for an uncertain future.
Taking the time now to think about the various directions your life could take, and putting some plans in place, could put your future on a steadier financial footing.
Telegraph Money explains how to protect yourself against the following events:
Losing your job
Being made redundant can derail not only your career plans, but your financial plans too. While you might get a redundancy payout, this is only a statutory requirement if you’ve been with your employer for at least two years.
“If this is a general worry rather than about something specific, check your contract to see what you would be entitled to if you lost your job,” advised Sarah Coles, head of personal finance at Hargreaves Lansdown. “If the redundancy payment isn’t robust enough to protect you, you can consider redundancy cover.”
These insurance policies will typically cover a portion of your salary for a year if you’re made redundant. Hopefully, the payout will keep you going until you get another job.
But it’s important to understand the limits of your policy and when it will pay out. Your policy wouldn’t pay out, for example, if you took voluntary redundancy or got sacked. Likewise you won’t be covered if there was even a whiff of redundancies taking place at your work when you took out the policy.
Even if you do opt for redundancy cover you should also ensure you have enough emergency savings – aim to have at least three to six months’ expenditure – in a competitive easy-access savings account. This will give you a financial cushion if you need extra help with everyday expenses, or if something unforeseen happens – such as your car breaking down.
Illness or injury
If you or your partner become seriously ill or suffer a life-changing injury, the last thing you’ll want is to worry about money.
The key is to plan for this eventuality while you’re still healthy.
Ms Coles said: “Once you develop a condition, it becomes much harder to protect your financial resilience, so it makes sense to consider how you would cope financially if your health deteriorated.”
In addition to having a healthy pot of emergency savings, it’s also sensible to find out what protection you have (if any) from work. This includes the conditions for your paid sick leave, and whether your employer offers income protection – which pays a portion of your salary if any illness or injury leaves you unable to work. This means you’re covered for mental illness and musculoskeletal problems, as well as physical illnesses.
If you’re worried that you don’t have enough cover from your employer, or you simply don’t receive any, you can consider buying an individual policy.
“These policies vary enormously, both in terms of the percentage they can cover and how long they run for. The more comprehensive they are, the pricier they tend to be, so for most people it comes down to a compromise between cover and cost,” said Ms Coles.
David Gibb, a financial planner at Quilter Cheviot, says another insurance policy to consider is critical illness cover. “Critical Illness Cover (CIC) is a valuable product that provides a lump sum payment if you, or a covered family member, is diagnosed with a serious illness. Many CIC policies also offer coverage for children, ensuring financial support during challenging times.”
However, it’s important to be aware that CIC will only pay out for the conditions listed under the policy (comprehensive plans typically cover around 50) and terms vary so it’s important to check before you buy. Usually only life-threatening conditions are covered, but you may get a partial pay out for less serious illnesses.
Death
“The death of a spouse is not only emotionally devastating but can also lead to significant financial strain,” says Gibb. “Life insurance is essential in this scenario, providing a pay out that can help cover funeral costs, outstanding debts and ongoing living expenses.”
However, while many of us have life insurance, research from Hargreaves Lansdown suggests 57pc of people with dependents don’t have enough – citing an average “life insurance gap” for homeowners with children of £194,200.
Ms Coles said: “In simple terms, consider the lump sums your loved ones would need, for example to pay off a mortgage or other debts. Then consider how much income they will need, and how long for.
“This is harder to estimate, because their expenditure will change – they may need childcare or a surviving parent may decide to give up work. You’ll also need to factor in the rising cost of living over time.”
It’s also worth looking into bereavement support payment, which can provide months of support to eligible grieving families.
Divorce
It’s impossible to safeguard your marriage, but you might be able to safeguard some of your finances should you and your partner wish to part ways.
Ms Coles said: “Before you tie the knot – when everything feels perfect, and your relationship can withstand the stress of talking about really tricky issues – ask about a pre-nuptial agreement. These go into the details of how you would split your assets if you were to break up. If you’re already hitched, and everything in the garden is still rosy, you may be able to bring up the subject of a post-nup, covering the same things as a pre-nup.”
However, it’s is important to note that while these can help in the event of divorce, they aren’t legally binding and any settlement would need to take into account the financial need of both people.
She added: “Whatever stage you’re at, it’s a good idea to have an emergency fund of your own, so you can keep a roof over your head and pay for some advice if things don’t go to plan. If they do, you can always spend it celebrating your golden wedding anniversary instead.”
Taking time out to care
While parents will often plan to take time out of work to have children, few consider how we would get by if we ever needed to take time out of work to care for a partner or elderly relative.
“When we think about the cost of care, we tend to think about the price tag for things like paying carers to come in for a few hours a day, or the nightmare costs of needing to go into a nursing home. However, if we informally care for a loved one, it comes with a hefty price tag too,” said Ms Coles.
Juggling work and care commitments is difficult, and many people are forced to stop working. “This not only causes enormous problems for your finances while you’re caring, but it feeds into smaller pensions too,” she added.
“The best way to give yourself the flexibility to find the solution that works best for your family, is to plan ahead. This means considering the possibility that we’ll need to care for someone we love when we’re older, and how we’ll pay for it.
“The earlier we plan for this, the better. It might mean you prioritise your pension earlier or put more into savings, so you have something to fall back on if your plans change.”
Don’t forget there are payments you are entitled to, both as the carer and the person being cared for. Attendance allowance, for instance, is worth up to £5,644.60 a year, for those with health conditions or disabilities who require additional support.
It’s also important not to overlook your state pension if you have to stop working, said Mr Gibb. Gaps in your National Insurance record could mean you miss out on getting the full state pension. However, carers spending 20 hours or more a week looking after someone, may be entitled to carer’s credits. “It’s crucial for anyone who performs a caring role to check their eligibility and apply,” he adds.
How to build your own safety net
Crucial to surviving any financial disaster is a good safety net, and the more you have in an easy-access savings account, the softer your landing will be.
For some, it may make more sense to bolster your own savings rather than spend out on several insurance policies.
Experts typically recommend maintaining three to six months expenditure for emergencies (or one to three years if you’re retired). “If this kind of sum has been impossible to build, don’t panic – your aim should be to put aside as much as you can afford, as soon as you can afford to do so. You’ll be grateful for every penny,” said Ms Coles.
If you’re short, there are plenty of pain-free ways to save money and free up funds to boost your balance quickly – our guides to budgeting strategies such as cash stuffing, zero-based budgeting and the 50/30/20 method could help.
For other ways to shave your outgoings, consider:
- Go through your bank transactions and look out for services such as gym memberships that you don’t use, and cancel them.
- Always shop around and haggle for a better price on insurance and utilities.
- Budget for luxuries – you don’t need to rule out all treats, but working out how much you’re spending on discretionary items can could be eye-opening. Identify where you’re splurging and set up a maximum budget each month.
- Work out how much you can afford to save each month and set up a standing order to move that money into savings as soon as you’ve been paid.
- If you’re not a disciplined saver, try using AI wizardry to help you put money away – autosaving apps will link with your current account, analyse your spending and work out how much you can afford to save and automatically pay that money into a savings account for you. Alternatively, you can try rounding services, where everything you buy is rounded up to the nearest pound and the difference paid into your savings.