I find something which is easily overlooked when seeking advice, is that it is just as important to understand your objectives for protecting your income as it for creating your income. When working with you, we look at protecting your income; your health – including long term care and critical illness; your mortgage; your business and; your life. Having the peace of mind to know that your income and your family are protected in the event that anything happens to you is an equally worthwhile long term investment and really can’t be underestimated.
So, let’s look at protecting your income in a bit more detail and understand why it’s so important:
- An employer is only obliged to pay the equivalent of statutory sick pay which is currently £88.45 for up to 28 weeks, which is a total of £353.80 per month (gov.uk). Whereas the average weekly household expenditure was £517.30 in 2013 (Office for National Statistics – December 2014).
- One in two people born after 1960 in the UK will be diagnosed with some form of cancer during their lifetime and the lifetime risk in the UK has been found to have increased over time due to longer life expectancy, meaning that more people are living into old age where cancer is more common (Cancer Research UK – February 2015).
- The number of deaths registered in the United Kingdom (UK) in 2013 was 576,458, an overall reduction of 13% from the total number of deaths (659,101) registered in the UK 30 years ago (Office for National Statistics – December 2014).
- 50% of people have a mortgage with no associated life cover (Scottish Widows Survey – May 2014)
- Only 5% of businesses in the UK have any form of Business Protection Insurance according to Legal & General’s research.
- Of the 26.4 million households in the UK in 2012, 5.7 million had whole of life assurance (Association of British Insurers – Key Facts 2014)
Types of Income Protection Policies
Some fairly brutal statistics and although we don’t like to consider anything bad happening to us or our loved one, these statistics show that ensuring we all have an adequate level of protection in place that is reviewed and updated regularly is really important. So what are the most common policies for protecting your income and what do they cover?
Income Protection – these policies usually pay a tax-free monthly income if you are unable to work. You pay a monthly premium to your insurer for your chosen policy which will pay out to you after a pre-agreed waiting period.
Mortgage Protection – mortgage payment protection insurance covers the cost of your mortgage payments if you are unable to make the payments due to an accident, sickness or unemployment which stops you from working. However, they usually only pay out for a year and if you resign, take voluntary redundancy or are dismissed for misconduct, or if you cannot work as the result of an illegal activity you are unlikely to be covered.
Critical Illness – these policies pay a tax-free lump sum or income on the diagnosis of certain life-threatening or debilitating conditions such as a heart attack, a stroke, and certain types/stages of cancer, multiple sclerosis, kidney failure, major organ transplant and loss of limbs. The illnesses will be specified in the policy along with any exclusions and limitations.
Business Protection – keyman insurance is designed to pay out an agreed cash sum if a key employee is suddenly unable to critical illness or death. Unlike personal insurance, the payment is a specified sum made to the business.
“You don’t buy life insurance because you are going to die, but because those you love are going to live.”
– there are different types of life assurance policies you can purchase; level-term (covers a specific period of time), decreasing-term (the amount you are covered for decreases over the term of the policy) and whole-of-life (pay out on death whenever that occurs so there is no fixed term) and which one we recommend will depend on your individual circumstances.
What are the right policies for protecting your income and how much does it cost?
Once we understand what your individual requirements really are and what you can afford, we can then look at the right policies for you. Whilst generally speaking policies can be reasonably priced, it will depend on circumstances such as whether or not you have dependents and if you are the sole income provider in your household.
We recommend you review your existing policies if you have any, to ensure that you have the right level of cover for your needs. For example, you may have Mortgage Protection but it may not be sufficient and you may wish to reduce payments as you pay off your mortgage over time. You may have an Income Protection Plan that relates to your salary from some time ago which has now increased.
We will also look at any other income sources you may have other than your salary (such as savings or investments) that you could use if your circumstances change.
You may also have employee benefits provided by your employer and if you are changing jobs see if you can negotiate additional benefits for you (and family members). What will your employer pay and for how long will they pay if you are unable to work?
What are your dependents likely to need? You may need to ensure any debts are covered or leave a lump sum to a dependent. Take advice early on long-term care as these payments can be costly.
The key point here is to start early. The younger you are when you take out such policies the less costly they are likely to be.
The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice
These links may be useful: www.moneyadviceservice.org.uk and www.direct.gov.uk
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