Are we serious about income protection?
There are many things to think about when buying a house, but is income protection up there? For many of us, a significant reduction in our earnings would cause serious financial worries, yet despite knowing this many of us don’t want to address the situation. According to figures from the charity Shelter 3.8million families are just one pay cheque away from losing their home.
Why do you need income protection?
Only last year the media headlines claimed that one in seven workers had been made redundant since the recession. You may think that’ll never happen to you but one in seven odds isn’t worth betting on. You may also think you’ll never suffer a serious illness but shocking statistics from the Department for Work and Pensions (DWP) claims that on average over the last 10 years 2.6 million people have been off work sick for over six months, and claiming benefit.
You can’t rely on state benefits either, you will receive something but the Government’s Employment Support Allowance will provide no more than one hundred pounds a week. Statutory Sick Pay will pay £87.55, but only for 28 weeks. Are you starting to build a picture of how hard it would be to meet your financial commitments? Unless you have a huge amount of savings stashed away I would seriously think about how you would support yourself, your dependants, loan commitments and everyday bills should the unthinkable happen. Let’s look at the options!
Income protection options
Unemployment protection insurance pays you a monthly benefit for the period specified in your policy, normally up to 12 months, helping you to meet your monthly outgoings such as mortgage payments and bills.
If you or your family rely on your monthly salary to manage financially you can protect it with short term and long term income protection insurance. This insurance could be used to help you meet any monthly outgoings such as mortgage or other loan repayments, utility bills or other expenses while unable to work.
Critical Illness Cover
If you were to be diagnosed with one of a number of specified serious illnesses this could provide a lump sum benefit, dependent upon factors including age and benefit level to help assist with larger expenses; such as house re-modification, if you had to move, maybe you would rather that the mortgage be paid in full, removing the concerns of repayment completely.
How would the household bills be covered if you or your partner were to die and left the surviving partner, spouse and children to meet financial expenses on little or no income? Life Assurance ensures that is one less issue to think about.
With each variant of insurance policy the terms can vary. There are cheap policies but these may only cover you for a year. Level of cover is very important and it is possible to receive 50% to 70% of your gross earnings up until the day you retire. Essentially it is best to work out how long you could survive before needing the cash and work back from there. It doesn’t have to cost a lot either. I’ve put together a few prices. They are based on an example of a male aged 30 years assuming a mortgage borrowing of £100k over a 30 year term on a Capital & Interest basis, equalling approximately £500 a month.
Accident, sickness and redundancy benefit of £500 a month for 12 months would cost you £15.18 a month. Income protection benefit of £1,000 a month until the end of the mortgage term could cost you £15.33 a month. Critical illness cover on a mortgage decreasing term basis £26.33 a month. Life cover on a mortgage decreasing term basis could be as little as £7.63 a month. It would be important to mention that these can be taken as individual schemes or as a combination of any and other variances are obviously available. You should always take advice when buying insurance as companies will apply limitations and exclusions. Also remember the above mentioned policies are not a savings or investment product and have no cash value unless a valid claim is made.
Given the pressures on household expenditure budget is going to be a huge consideration, but if you know your savings would only last a couple of months, and you’d have a very real chance of losing your home, you do need to make plans to ensure you are protected. Still unsure where you stand? Speak to an independent mortgage advisor who will take you through the right cover for the right situation at the right time.