3 ways income protection can be a life saver 2023
When people think of insurance they usually think of life insurance
, car insurance, house insurance, pet insurance and travel insurance
is another biggie.
But, the insurance that underpins all of this is income protection. Without an income you are not going to find it easy to pay for anything. You will have your essentials like mortgage or rent, heating, water, food. There’s also all the other extras that many of us love: Netflix, daily coffee at our favourite barista, football season pass, the kids’ swimming lessons, our annual holiday to the sun, sea and sand.
Just because someone is ill and cannot work, it doesn’t mean that they should have to give up on everything they enjoy and get a break sometimes. Here’s 3 key things for you to know about income protection
1. State benefits are not guaranteed and they’re low!
Some people can think well if it happens I will just access benefits like other people do. You can do this but there is something to really consider here. People on state benefits are often just about surviving financially, some aren’t even able to do that. Taking out an income protection policy means that you can maintain your standard of living for you and your family, based upon your current income levels.
There’s also the whole statutory sick pay debate. SSP is good in that it does help people, but do you know how much you will actually get?
Statutory sick pay at the date of this blog is currently £109.40 per week. You will be paid this for a maximum 28 weeks. This is £3,063.20.
So if you do become ill, have no income protection and only have SSP, you will receive just £3,063.20 per month from your employer to live off for 6 and a half months.
That’s roughly £474 per month to live off.
I don’t think many people could pay even their essential outgoings each month on this amount of money. Legal and General produced a report in 2022 that showed from their research that the average household in the UK is only 19 days away from being unable to pay their essential bills, if their income ends.
By taking out an income protection policy you are giving yourself financial peace of mind. Something known as cashflow modelling is perfect to show you what your future finances look like. We know some excellent cashflow specialists that you can speak to you if you want to know more. It sometimes really helps to see a chart with all the colours and breakdowns of what will happen with your money once you retire and if you fall ill and cannot work.
Remember that if you can’t work it isn’t just your income now that is affected. It will impact your pension contributions too. Yes there is the UK state pension but a lot of people don’t know the full way that it works.
The UK state pension works by people that are retired now being paid their pension, from the people that are working now. So our money that goes towards state pension isn’t for our own pensions, it’s supporting the retired people right at this minute. State pensions also aren’t guaranteed so it could all change by the time that you retire. This is why the pensions you pay into through work are so important, they are fundamental to your future financial security.
2. Income protection isn’t as pricey as people think
A lot of people look at the price of income protection versus life insurance and think ‘wow, that’s a lot’. Well, it’s kind of yes and no. Life insurance for the majority of people is incredibly cheap. The reason for this is because the risk of you actually dying at a young age is really quite low.
Income protection on the other hand is quite different. I am 38 and the risk of me being unable to work due to ill health for a period of 2 months or more is around 40%, compared to 5% risk of dying before my expected retirement age of 68.
This is why income protection looks comparatively more expensive. You are far more likely to claim on it than you are a life insurance policy.
So, what about the cost?
Let’s take a look at Nick. Nick is 27 years old and working as a web developer and he only gets statutory sick pay through work. Here’s what an income protection could look like for him.
- A monthly benefit of £1,350
- Financial support will kick in after 4 weeks of being ill and unable to work
- A successful claim has the potential to pay right up to his retirement age of 68
- All for £34.28 per month
So for £1.13 a day we can protect Nick’s income for the next 39 years. Let’s say that at the age of 30 he suddenly becomes ill and can never work again. The insurer will pay him 38 years worth of his income which is a grand total of £615,600.
You might notice the words ‘potential to pay’ in the bullets above. We have to say this and for very good reason. Let’s say that Nick breaks his wrist and cannot work for 3 months but after this time is absolutely fine. The insurer will pay him for the time he is off work and then stop the claim when he starts working again. The policy will then carry on in case he needs to claim again in the future.
But let’s say Nick develops Parkinsons and eventually reaches a stage where he cannot work ever again. The insurer will pay him a claim from when he stops working to his retirement age. The potential part comes from the fact that it depends upon the reason that a person is ill.
3. Your own personal cash machine
There is an example that we use in the advice space to help people to understand why income protection is so important, if all the figures above haven’t convince you already!
What would you do if you had an ATM outside your front door and your money came shooting out of it one morning each month? If you missed your chance to get the money you would not be able to get guaranteed cash any other way.
You’d protect it right?! You would probably have a few close friends guarding you to make sure no-one tried to steal it. You might put up a big fence or metal box around it with a padlock. Cameras facing towards it, the whole works.
You are the ATM.
Your income is completely dependent upon you and your ability to work. It’s not fun but it is worth sitting down and thinking about what you would have to give up and change if you had to stop working. If what you see isn’t a lifestyle that you would like to live, then an income protection policy is worth considering. We will give you a no obligation quotation so that you can decide what is right for you.
Our expert advisers will find you the best income protection policy to give you the peace of mind that your current and future financial security is being taken care of.