Set up your savings safety net

It is absolutely vital to have a savings safety net. Everyone needs to have a saving safety net made up of enough money to cover your expenses for at least three months, ideally for six months. To work out how much you should have as your savings safety net, write down your essential monthly outgoings – things like mortgage or rent payments and food bills – and multiply the figure by three to give a three month safety net amount.

Of course, it’s not easy when you’re only just coping day-to-day, but it really is important to set up this savings account. That way, if you suddenly lose your job or you can’t earn because of sickness or other problems, you can at least pay your bills and keep the roof over your head.

Effectively you’re insuring yourself against financial disaster. The best part it is that if you don’t lose your income, you still have a nice wad of money quietly growing in a savings account.

If you don’t have a savings safety net yet, the way to do it is to open a good, easy access savings account now. Put into it any spare money that you have each week. Even if you think you don’t have free cash day-to-day, you’ll be surprised how even your small change can add up.

Consider income protection insurance

The next best thing to self insuring is to take out income protection insurance (IPI). It won’t protect against unemployment but it will replace some of your salary if you have an accident or illness that stops you working for a while.

The pros of income protection insurance are that good policies will pay out until you’re ready to return to work (even if that’s in a few years).

If you never recover enough to work again, it should then pay you an income until you reach retirement age. You get paid weekly or monthly, and the payments are tax-free.

On the downside, you usually have to wait quite a few months before you start to get the benefits – around 13 weeks (three months) is the norm. You can get policies that will pay you from the moment you have to be off work – but the monthly premiums for those are much higher.

Be careful of redundancy insurance. It should be avoided by most people as it’s generally expensive to buy and, in many instances, it doesn’t pay out when you need it.

Get Mortgage Payment Protection Insurance

If you’ve set up a savings safety net for yourself, it should include enough to pay your mortgage each month.

However, if you don’t have money in a savings account and you do have a mortgage then you should have mortgage payment protection insurance (MPPI)

If you decide to take out MPPI, it’s vital you shop around – don’t just get the insurance offered to you by your mortgage lender. Figures from the Council of Mortgage Lenders show that of the borrowers who have MPPI, three-quarters took out the cover with their mortgage provider. These ‘bolt-on’ policies tend to be more expensive, and like any other type of insurance you can usually make big savings by shopping around.

You can get cover for around £5 a month for every £100 of monthly repayment – but a policy from your lender could cost three times as much.

As well as looking at the price of MPPI, you need to be aware of exclusions with the cover. Most MPPI policies will exclude stress and back trouble – two of the most common reasons for claims – so ideally you should find a policy that includes these conditions.

MPPI normally pays out between 30 and 60 days after you become unable to work and continues to pay the benefit for 12 months (sometimes 24). Be aware that claims will not be met if you knew you were likely to be made redundant when you took out the policy.

Get Critical Illness Cover

A lot of people are unable to work for long periods – over two million in the UK currently claim State incapacity benefit for more than six months at a time. Critical illness insurance will give you reassurance in these circumstances, if you can afford it.

Some types of insurance will give you ‘level’ or the same pay-out during the policy term (in other words, you could get a lump sum pay-out if you get ill at any time while the policy runs).

However, it is possible to buy cover where the lump sum gets smaller over the five years – and this sort of cover is cheaper. This type of ‘reducing’ critical illness cover is designed to be used with decreasing home mortgage repayments. Less and less cover is needed as the mortgage gets paid off.

Happily, thousands of workers receive critical illness cover as part of their employment package, so they don’t have to pay out of their own pocket. If you’re self-employed and the only or main earner in a household however, it might be worth considering this type of cover, if only for a few key years. The cash can be a major boon if your health goes wrong.

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