Reduced welfare spending, an ageing population and increasing financial insecurity among Britons makes it necessary for some form of income protection.
We all tend to think the worst will not happen and therefore may not be financially prepared for it when it does – either because we have not taken out individual income protection (IP) or taken advantage of whatever group income protection (GIP) our employers may offer.
But for those in work, Andy Simmons, senior income protection specialist at VitalityLife, calls it: “Probably the most important protection product to buy.
“The retreat of the welfare state makes it very important to have a safety net in place. The state may provide the bare minimum to survive, but to maintain your lifestyle, people need their own policy, especially if they are self-employed.”
Compound the lack of insurance with a lack of savings, and it is clear there is a real need for proper financial protection.
Katharine Moxham, spokesman for Group Risk Development, comments: “Latest findings from the Money Advice Service highlight 21 million UK adults do not have even modest savings of £500 to replace a fridge or mend a car.
“Three-quarters of these do not have a savings buffer equal to three months’ salary. On top of this, working-age people often overestimate how much the state will support them and their family in the event of ill health or disability.”
According to the 37-page report, Building Resilient Households, one million people in the UK suffer a prolonged absence from work due to sickness each year but only one in every 10 have some form of insurance.
As a result, the report stated: “Many families suffer financial hardship and lasting damage when there is a prolonged absence from work due to sickness.”
Moreover, the report found there were several factors that could exacerbate the financial hardship of being out of work due to illness, all the while the mortgage, bills, household expenses, school fees and other associated costs of living have to be met each month.
Findings from the report included the following:
- Most people have to rely initially on Statutory Sick Pay (SSP) of £88 a week. SSP is not available to the self-employed.
- Up to half a million would find their savings run out after just a few weeks.
- State benefits assist some people but often the payments aren’t enough to help them meet inescapable commitments.
- Household resources are strained. Rising housing costs, ‘generation rent’, student loans, auto-enrolment into pensions and reliance on the ‘Bank of Mum & Dad’ mean household budgets are likely to remain under pressure for most families.
State disability benefits
Anyone believing the state will adequately provide for them, should the worst happen is wrong.
Paul Avis, marketing director of Canada Life Group Insurance, highlights a series of changes to benefits made under the current and previous government which will severely curtail the scope of state benefits.
1) Universal Credit
Under the new Universal Credit regime, the limited capacity for work element will be abolished to mirror changes to employment and support allowance (ESA). This reduces support for those deemed capable of some work-related activity.
As part of the move to Universal Credit, from 6 April this year, applicants for ESA assessed as unfit for work but capable of some work-related activity will receive a lower level of state benefit, equivalent to the jobseekers’ allowance.
“This means the value will fall from £5,312 to £3,801 a year”, says Mr Avis. “Can anyone really live on this? Assuming not, then income protection – group income protection – could be the most important benefit any employer will purchase on behalf of its employees.”
2) Benefit cap
From 7 December 2016, the benefit cap was reduced. It used to provide £500 a week for single parents and couples and £350 a week for single people with no dependents. But now, the total amount for a couple or single parent is £442.31 a week in London, and £384.62 a week elsewhere.
3) Support for mortgage interest
This used to be a significant benefit, as it allowed people to meet interest payments on their mortgage, but this is soon to be switched off.
In April 2018, the new support for mortgage interest (SMI) payments will not be a benefit but will be paid as a loan. The claimant will have to pay it back when they return to work – or sell their house.
Also, on 1 April 2016, the SMI waiting period was extended from 13 weeks to its pre-recession period of 39 weeks, with a capital limit set at £200,000, regardless of the increase in house prices and lack of wage growth.
After April 2018, housing benefit will not be paid if individuals have group income protection – so it is worth making sure your clients have the best possible group and individual cover possible to protect them.
As Mr Avis points out: “In simple terms, protecting your income is more necessary than ever.”
According to figures from Royal London, the average 30-year-old, retiring at 65, has a 38 per cent chance of being off work for two months or more during their working life. This could seriously affect the cost burden on the taxpayer unless individuals have appropriate cover to protect themselves.
Moreover, with a lack of affordable housing, it is not just homeowners who could be at risk.
Royal London’s protection proposition design specialist Jennifer Gilchrist warns the 5.5 million working renters would “be at risk of not being able to pay the rent” because of a lack of financial protection.
“We are seeing the rise of long-term renting and 1.5 million of these have children”, she says. “Raising awareness of the benefits of insurance is so important if we are to get more people to understand the consequence of not having a financial safety net in place, should the worst happen.
Source: FT Adviser, January 2017