piggy bank in deep water

Could you cope in a financial emergency?

What would you do in an FINANCIAL emergency?

Half of us have absolutely no idea how we would survive if we lost our main source of income following death, sickness, redundancy or divorce, according to research from insurer Bright Grey. Most simply don’t have enough money set aside. The average person could survive just 19 days on their savings, Legal & General says. So how do you protect yourself?

Everybody should try to save 3 to 6 months worth of income in a rainy day fund. Even if you can’t save that much, and frankly, most of us probably can’t, you should do the best you can. Keep the money on in an easy access deposit account where you can get your hands on it in a hurry, and shop around for the best interest rate.

If you have financial dependants such as a partner or children, you also need to take out life insurance. By far the most popular type of life cover is called term assurance. This pays a tax-free cash lump sum if you die within the term of the policy, but nothing if you die afterwards. Many people take out cover for a 25-year term, to protect their mortgage. If you’re closer to retirement, you may get by with a shorter term.

Life insurance has actually been getting cheaper, thanks to rising life expectancy. A 35-year old non-smoker could get £100,000 cover on a 20-year term from around £7 a month, rising to around £25 a month at 50. There is little to choose between different term assurance policies, so you can buy one yourself by shopping around online.

Death isn’t the biggest threat to your family’s finances. You are 4 times more likely to fall seriously ill before age 65, and the financial implications could be just as painful. Currently, state sickness benefits are worth just £86.70 a week, but the average household spends £484 a week. That leaves quite a shortfall. You should therefore consider another type of protection, known as critical illness cover. This cover pays a tax-free cash lump sum if you suffer a serious illness such as cancer, heart attack or stroke.

You can save money by taking out a combined life and critical illness policy. The average 35-year old non-smoker could get £100,000 cover for around £33 a month over a 25-year term, and from £80 at age 50. Another type of cover called income protection may offer a better safety net. It pays a long-term replacement tax-free income if you fall sick and can’t carry on working. Don’t confuse it with the much-maligned PPI cover, this is far superior. At age 35, a non-smoker could get replacement income of £1,500 a month from around £30 a month, rising to around £50 a month from age 50.

You can’t protect against every eventuality, but that should cover most of them.

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