While you may have noticed your cost of living has increased in the last few months, have you considered how it could affect the security financial protection will provide?
According to the Office for National Statistics, inflation increased by 9.4% in the 12 months to June 2022. Across all your essential and discretionary spending, your outgoings may have increased significantly. While you may have reviewed your budget or other plans to reflect inflation, it’s easy to overlook financial protection.
As a result, financial protection that may have provided adequate security just a few months ago may no longer be enough.
Inflation could mean your financial protection falls short
While the pay-out financial protection could provide may not have changed, its value in real terms may have.
Financial protection you may have could include:
- Critical illness cover that pays out a lump sum on the diagnosis of illnesses named within the policy
- Income protection that would pay a regular income, usually a proportion of your salary, if you’re unable to work due to an accident or illness
- Life insurance that pays out a lump sum to your loved ones if you pass away during the term
- Income family benefit that pays out a lump sum to loved ones for a defined period if you pass away.
All these types of financial protection can help ensure you or your loved ones have financial security if the worst should happen. If you haven’t considered how inflation has affected the income or lump sum you’d need, it may mean the protection you have won’t provide the safety net you intend it to.
Understanding what pay out you or your family would need to receive to attain financial security in the circumstances that make financial protection useful is crucial. As this may have changed since you took out financial protection, you should review it.
A review now means you have an opportunity to update the financial protection you have, or if necessary, take out more, to ensure you and your family wouldn’t experience a shortfall.
While inflation reached 9.4% in June 2022, it’s expected to rise further, and your personal inflation rate may be very different as it will depend on your lifestyle and spending priorities.
In addition to financial protection, inflation may have affected how appropriate other insurance is, such as your home and contents insurance.
Keeping track of how your spending and assets have changed due to inflation can ensure that if something happens, you have the right level of protection to fall back on. A regular review of the insurance you hold can give you peace of mind.
Should you consider inflation-linked protection?
In many cases, financial protection will pay out a specified lump sum or income that doesn’t change during the term. However, some options mean the pay-out will increase in line with inflation.
This can be useful for financial protection that you not may take out for years, or even decades, as this means inflation has a longer period to affect the value.
For example, you may choose to take out life insurance until your children reach adulthood. During this time, it’s likely your family’s cost of living will change significantly, thanks in part to inflation.
So, choosing financial protection that will increase in line with inflation or by a fixed percentage each year can make sense. It can help ensure that the pay-out, whether it’s a lump sum or regular income, can cover what it was intended to without having to update it every few years.
If you’re interested in inflation-linked protection, it’s still important to weigh up the other factors, such as the circumstances in which it will pay out and the cost of premiums.
We’re here to help you review your long-term financial security
From financial protection to an emergency fund or a pension for your retirement, your long-term financial security is an important part of your financial plan, and inflation may affect many areas.
If you have any questions about what inflation means for you and the steps you’re taking, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
