Expert View: Have cover in place for the hard times

When thinking about how to protect against financial disaster, it is easy to become confused about what you should actually protect against, whether it's redundancy, illness or a death in the family.

The key is to decide what risks you run and how you would manage if the worst were to happen. Write down what would happen in terms of your income and lifestyle if, for example, you could no longer work. Some people are lucky enough to have cover provided by their employer and many aren't aware of this. Do an audit to see what protection you already have before deciding what additional safety nets to put in place.

To prioritise, I suggest considering the four Cs:

• Chances: what are the chances/likelihood of the "disaster" - highly likely or very unlikely?

• Consequences: what would the consequences be eg reduction in lifestyle, loss of home, temporary inconvenience?

• Cover: what cover is available and how effectively does it address the consequences?

• Cost: what is the cost/benefit, does it represent good value for money?

Guidance is often required in all four areas. For example, not many people realise that they are far more likely to suffer a critical illness during the term of their mortgage than they are to die, so it does make sense to cover both eventualities, provided the costs aren't prohibitive.

You also need to ensure that you would be able to make a valid claim in the event of a disaster. Some people who were sold payment protection insurance (PPI) by a bank have discovered that the insurance didn't cover them because they were self-employed. Most PPI now covers the self-employed, but be careful.

One of the simplest ways of protecting against disasters is simply to build up a cash contingency - six months net income is a good target in this respect and can see you through rough patches.

• Derek Smith is a director at Melville Hutchison Financial Management