What is Protection Insurance? A Financial Safety Net

A robust financial plan is designed to help you achieve your goals. A comprehensive protection strategy is designed to ensure that, even if the unexpected happens, your financial plan stays on track.

Key Takeaways

A strategic approach to insurance starts by categorising the insurance type by the risks it mitigates e.g. Protecting your income and lifestyle, your major assets, and your legacy
The core pillars of personal protection. Income protection, critical illness cover, and life insurance, help safeguard your long-term financial wellbeing
Specialist policies, such as life insurance written in trust, can be used as effective tools within a broader estate planning strategy to help manage future tax liabilities.

Building Your Financial Safety Net

“Insurance” can feel like a vast and complex topic, full of jargon and overlapping products. Yet, when viewed through the lens of your financial plan, each type of insurance has a clear purpose – to protect your lifestyle, your home, and the people you care about if life does not go to plan.

This document provides a strategic overview of the main types of insurance that can help form this financial safety net.

Category 1: Protecting your Lifestyle and Income

The priority here is to protect your most valuable financial asset, your ability to earn an income. Together, these policies are often referred to as ‘protection’ or ‘personal protection’.

Income Protection

Income protection is designed to provide a regular replacement income if you are unable to work due to illness or injury. Where the policy is personally owned and premiums are paid from your post‑tax income, benefits are normally paid tax‑free.

Policies generally ensure a percentage of your gross income, typically up to 50–70%, and include a deferred period (commonly 4, 8, 13, 26 or 52 weeks) before benefits begin. This helps balance cost and the level of protection.

Income protection is intended to cover essential expenditure, which is particularly important because Statutory Sick Pay (SSP) provides a comparatively low level of support (£118.75 per week for 2025/26, payable from day four of sickness).

If your employer provides contractual sick pay, the level and duration of that cover should be considered alongside your chosen deferred period, so that the two arrangements work effectively together and do not leave gaps or duplications.

Critical illness Cover

Critical illness cover pays a lump sum if you are diagnosed with a specified serious illness as defined in the policy terms. The conditions covered, and the severity criteria, vary between providers. For personally funded policies, benefits are normally paid tax‑free. The lump sum is designed to help you manage the financial impact of a life‑changing health event.

Life Insurance

Many policies can also be written in trust, which can help ensure the proceeds are paid directly to your beneficiaries without waiting for probate, and may keep the payout outside your estate for inheritance tax purposes, depending on the type of trust used. The specific structure and tax treatment will depend on the trust arrangement and should be reviewed carefully.

Category 2: Protecting Your Major Assets

For many people, their home is their single largest asset. For others, this may be supplemented by rental properties or other significant possessions. While this guide does not cover every type of general insurance, ensuring that key assets are appropriately insured is an essential part of a robust financial plan. Buildings insurance is usually required by mortgage lenders, and contents Insurance is strongly recommended to protect your belongings. Specialist landlord insurance may be relevant if you own rental property.

Category 3: Protecting Your Legacy (Estate Planning)

Insurance can also be a highly effective tool within an estate planning strategy, particularly when it comes to managing a future inheritance tax (IHT) liability.

Inheritance Tax Planning

In the UK, estates that exceed the nil‑rate band (and any available additional allowances, such as the residence nil‑rate band) may be subject to inheritance tax, which is generally charged at 40% on the value above these thresholds.

A whole‑of‑life insurance policy, when structured within an appropriate trust, can provide a guaranteed future payout and may help ensure funds are available to meet an expected tax liability. This approach can be effective where premiums are affordable and the trust arrangement is correctly established.

Life insurance used in this way typically forms part of a broader estate planning strategy, which might also include lifetime gifting and making full use of available allowances.

When Should You Review Your Insurance?

Major life events are often the points at which it makes sense to review your protection arrangements. Examples include, buying a home or increasing your mortgage, having children or taking on new caring responsibilities receiving a promotion, starting a business, becoming self‑employed, inheriting wealth or approaching retirement.

Events like these can change the level and type of cover you need, which is why protection should be viewed as an ongoing part of your financial plan rather than a one‑off decision.

How Much Cover Is Enough?

The right level of protection depends on your income, financial commitments, and family circumstances. As a starting point, typically people look to:

Life insurance: Set the level of cover to repay outstanding debts (such as a mortgage) and provide a lump sum for dependants.
Income protection: Choose a benefit level that would broadly cover essential household expenditure if you were unable to work.
Critical illness cover: Select an amount that could, for example, clear the mortgage and create financial security during recovery.

Business Owners

If you are a business owner, your protection needs may extend beyond your personal finances. Certain types of business protection can help ensure continuity if a key individual dies or becomes seriously ill. Common examples include:

Key person insurance: This provides the business with a lump sum if a key employee, director, or shareholder dies or suffers a critical illness covered by the policy. The proceeds can help meet ongoing costs, replace lost profit, or fund the recruitment and training of a replacement, helping the business maintain stability during a difficult period.
Shareholder protection: This type of cover helps the remaining business owners retain control of the company if a shareholder dies or is diagnosed with a critical illness. It typically provides funds that can be used to buy the deceased or incapacitated shareholder’s shares, ensuring ownership stays within the business and reducing disruption for clients, employees, and the wider organisation.
Relevant life plans: A relevant life plan is an individual life insurance policy arranged and paid for by the business, providing a tax‑efficient way to offer death‑in‑service‑style benefits to company directors or employees. It pays a lump sum to the employee’s beneficiaries if they die while the policy is active, without the need for a large group scheme.

Together, the mentioned types of policies sit alongside your personal protection arrangements, helping build resilience for both your household and your business

How These Insurances Work Together: A Short Example

James runs a small digital marketing agency, while his partner Sally works part‑time and looks after their two children. Their home and mortgage depend on James’s income, and the business relies heavily on his skills. To protect both family and business, they have arranged life insurance, critical illness cover, income protection, key person insurance, shareholder protection, and a relevant life plan.

If James becomes seriously ill: If James is diagnosed with a serious illness, his critical illness cover pays a lump sum that could be used to reduce the mortgage, meet treatment costs, or provide financial breathing room. After his 13 week deferred period, income protection begins paying a monthly income, helping the family keep up with household bills. Meanwhile, the business receives a payment from key person insurance, allowing it to cover lost profits or hire a temporary replacement so operations can continue.
If James cannot return to work: Should his illness prevent a return to full time work, shareholder protection provides funds for the co owner to buy his shares. This ensures the business remains stable and James receives fair value for his ownership, supporting the family’s longer term financial security.
If James dies: If James dies unexpectedly, life insurance (usually held in trust) pays a lump sum that helps Sally clear the mortgage and maintain financial stability for their children. The company’s relevant life plan also pays a tax efficient benefit to his beneficiaries. At the same time, shareholder protection gives the business the funds needed to buy James’s shares from the family, ensuring continuity and fair compensation. Key person insurance helps the business manage the sudden loss by covering revenue disruption and recruitment costs.
If an employee dies or becomes seriously ill: The business also holds a relevant life plan for one of its employees. If that employee dies, their family receives a lump sum payment.

A Strategy for Confidence

The different types of insurance are not just standalone products, they are interconnected components of a single, coherent strategy designed to manage risk. The aim is to provide the confidence and peace of mind needed to pursue your long-term goals, knowing that a robust safety net is in place.

Important Information about Insurance

Insurance policies are subject to eligibility criteria, medical underwriting, and the specific terms and conditions of each provider. The level of cover, exclusions, and definitions of insured events can vary significantly between insurers, so it is important to review policy documents carefully before making a decision.

Premiums must be maintained for cover to continue; if you stop paying premiums, your policy will usually lapse and any protection will cease.

The tax treatment of insurance benefits depends on individual circumstances and may change in the future.

Insurance should be reviewed regularly to ensure it remains appropriate for your needs.

All details are correct at the time of writing (13^th February 2026)

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment or protection advice and is for guidance only. Some rules may vary in different parts of the UK. Case studies used are fictional and for illustrative purposes only. Trusts, Estate Planning, Inheritance Tax planning & Tax Planning are not regulated by the Financial Conduct Authority. Approver Quilter Financial Services Limited February 2026.