Sarah Robinson, Chartered Financial Planner at Leeds based financial planning firm Manse Capital considers the value of Income Protection and why it should be at the top of your list when it comes to insurances.
You insure your house, its contents, your car, mobile phone and even your beloved pets but what about your income? The one thing that allows you to enjoy and maintain your day to day lifestyle.
Recent figures from a 2015 protection survey identified that only 7% of people have in fact protected their income with an income protection (IP) policy. This compares to 38% that protect their family and loved ones with life cover and 14% that have critical illness cover. The irony here is that IP is the policy most claimed upon, while life assurance is the least claimed.
An IP policy is designed to provide you with a regular tax free income if you are unable to work due to illness or accident. There is a limit on how much you can be insured for and this is typically between 50% and 70% of your gross annual earnings. In the event of a claim, the income benefit will continue to be paid until the policy ends (most frequently linked to your expected retirement age) or you return to work.
Please don’t confuse IP though with Payment Protection Insurance (PPI). PPI covers you for a specific debt, usually a mortgage, loan or credit card; you can’t use the funds to meet your day to day costs of living. It only provides short term protection and pays out for a limited period of time, typically 12 months.
If you couldn’t work for a period of at least 12 months or longer, how would this impact your life and/or your family’s lives? Could you still afford to pay your mortgage and keep your home, pay your children’s school fees and any childcare costs?
You may already have some life and critical illness cover which at claim stage typically provide useful lump sums; that’s great, a step in the right direction to some good solid financial planning foundations. However they do not deal with your day to day income needs and particularly if you can’t work due to an illness that isn’t classed as critical. The facts are that the top two reasons for needing time off work are back pain (musculoskeletal conditions) and mental health and in fact none of the top four reasons would usually be covered under critical illness cover.
It is not uncommon to be advised to have at least 3 months income in cash savings as a cushion against being unable to work due to illness. The most appropriate level will however depend on your individual circumstances and taking account of any employer provided sick pay arrangements. Of the individuals surveyed, 55% only had up to 3 months of income in savings with 29% having less than a month of income saved.
This is particularly worrying when statutory sick pay is currently just £88.45 per week (payable for up to 28 weeks only) compared to £208 per week which is the median amount that is required to cover household bills only. What happens when your cash savings run out and your sick pay entitlement ceases?
What I still find difficult to understand is why the uptake for income protection is still so low given the security and peace of mind I have seen it can provide at a time when the focus should be dealing with and/or recovering from the illness in question. The top two reasons stated for not having IP are that it’s too expensive and that sick pay will be sufficient. Unfortunately the latter reason really couldn’t be further from the truth particularly with a long term illness and in reality many will only seek protection when it’s too late i.e. when they are already ill or injured.
If you already have an IP policy, rest assured that you have taken the right steps to provide some financial security for you and your family; if you are in the ‘it will never happen to me’ camp, I get that and I only hope that it never does.
Resources: Figures stated are taken from the 2015 Drewberry Protection Insurance Survey