I realise income protection is not a terribly exciting concept, but it is nonetheless important and something that is often overlooked.
Safeguarding what you already have is one of the three main pillars of financial planning and essential to your wellbeing. Putting as little as five or ten percent of your salary into protection in all its forms can make a massive difference if a curveball is thrown your way and it should be prioritised before money is designated to savings or investments.
Worst case scenarios
Income protection does what it says on the tin. If you are unable to work due to illness or an accident, then an insurance policy will usually replace 50-60% of your gross salary and is free of tax and national insurance.
Life cover is the cheapest form of protection because it is the least likely event to occur. It ensures your family will receive a lump sum of money should you die. (Many people underestimate what the sum is likely to be.) Unfortunately, catastrophic situations do occur and I have not only seen the outcome when insurance was in place, but also the stress caused by having no life cover.
Critical illness is another valuable insurance and one that is far more likely to be necessary, hence the increased cost. It also pays out a lump sum, if and when it is needed.
Again, I have helped people through such claims who, fortunately, had a plan in place. For example, a family benefited from a £25,000 payment when their toddler had to undergo an extensive operation recently. It enabled them to take unpaid leave from work and not worry about their finances during this difficult time.
Peace of mind
Some insurances we are forced to take, such as house or car policies, others like boiler or mobile phone cover, are optional. In an ideal world, we would probably insure everything we have of value, but that’s not usually possible.
Let’s imagine, however, you have a cash machine in your living room that dispenses a set amount of money every month. Would you insure against it breaking down or being stolen? Well, that cash machine is you! What happens to your family if you break?
There are income protection policies that provide you with the reassurance that should you be unable to work for a reason that is not covered by critical illness, your bills will be still paid. Despite being unable to foresee the future, some people don’t think them necessary. Here are the most common reasons why:
My employer will look after me: They might do, but is it mandatory and for how long? Some jobs offer really good renumeration packages, but many employees only have statutory sick pay in their contract. This currently amounts to £109.40 per week for 28 weeks. How long would your budget last if you swapped your salary for that?
I have a teacher client who was unable to work for more than 12 months, at which point their salary dropped to nothing. They were extremely grateful for an income protection policy taking effect. Another client (a doctor) is currently in a successful claim period after having to take long term sick leave. Most people would regard the teaching profession and the NHS as gold standard employers, yet in both cases, my clients exceeded the employer cover provided for illness.
‘Insurers don’t pay out though’: This is a common assumption but completely baseless. In 2022, Liverpool Victoria settled nearly 4,000 claims at a cost of £50 million. Aviva honoured a further 3,500 claims, costing another £50 million, so the evidence shows income protection does work and provides valuable support when it is needed.
Whilst the average income protection claim lasts for about six years, Liverpool Victoria has the longest on record at 37 years and counting. The person, who has been unable to return to work, chose a policy that would pay out until she reaches the age of 65, at which point the contract ends.
The right advice
Setting up a policy correctly means making the right choices and good advice is needed to make sure you have sufficient cover and the correct term. If you are on a budget, a policy offering payments for one or two years can provide a buffer if the possibility of long-term benefit is too costly.
As well as individual plans, there are policies designed for business owners that can be extremely tax efficient when claimed as an expense, as well as providing valuable personal assurances. If you wish, they can also be set up to continue to pay your pension premiums.
The insurances mentioned above all dovetail together, one does not remove the need for the other. I would urge anyone with responsibilities – rent, a mortgage, children, etc. – to consider income protection cover. The 37-year claim with Liverpool Victoria had an annual premium of £122. By the time the claimant reaches 65, she will have benefited from around £340,000. This might be an extreme case, but it underlines the value these policies offer.
If you would like to talk to one of our experts about income protection, or to arrange a free initial consultation, don’t hesitate to contact us on (01246) 298181 or email me: jon.stevens@belmayne-ifa.com
