How long would your bank balance last if you couldn’t work due to injury or illness? Unfortunately, the answer for many of us is: ‘not long’, leaving us at risk of running up significant debts whilst we struggle to pay the bills and even of losing our home if we can’t meet the rent or the mortgage payments.
According to the Chartered Insurance Institute’s (CII) Building Resilient Households report, one million people in the UK suffer a prolonged absence from work due to sickness every year and more than 300,000 leave work due to ill health. Yet a quarter of Brits could afford to pay household bills only for a maximum of three months if they or their partner were unable to work due to long-term illness, and 26% would be able to make only three monthly mortgage payments at the most.
Did you know...?
- Almost half (46%) of UK households have savings of less than £1,500
- The average cost of raising a child to age 11 is £85,000
- 57% of absences are amongst people under the age of 50
- Sickness absence costs the UK £15bn each year
What level of income protection do I need?
When it comes to income protection, it isn’t a case of one size fits all. Long term income protection covers you until you are fit enough to return to work or until you retire, whilst a short term income policy can protect you for up to a year. Policyholders can also choose from options such as involuntary redundancy cover or mortgage payment protection. Whichever you opt for, the key, according to Julie Hughes-Edwards of leading insurers AIG Life, is to prioritise your financial needs depending on your individual circumstances.
“Sadly, income protection does seem to be one of the products that many people think they can do without,” says Julie. “Their first thought is that they need to buy life insurance, often triggered by buying a house or having a child, but the reality is we are more likely to become sick than to die!
“I think getting people to understand what their financial needs are is very difficult; people look at the worst case scenario first without realising they could simply fall sick. And it’s less likely to be a critical illness - it could be anything, from mental health issues and depression to being in a car accident, which may not be too serious but could lead to a few broken bones necessitating time off work.
“It’s quite shocking to discover that most families have just one month’s salary in savings. If you need to be off for longer and your employer doesn’t support you, you might be entitled to statutory sick pay but may find it’s not enough to cover the bills. Also, people need to consider what would happen if they can’t return to work full time. They may need to reduce their hours and income protection can help to top up a part time salary.”
Julie believes it’s also essential, once cover is in place, to review and update it as your circumstances change. “Once income protection is in place, people forget to check it continues to match their income,” she says. “We advise checking it regularly with a financial advisor and, for example, reducing the cover if your income reduces.”
With just one in 10 workers covered by income protection insurance, what other ways are there to pay the bills if you’re unable to work for a spell?
Occupational sick pay scheme
Your employer might offer a staff sick pay scheme, with entitlement depending on criteria such as length of service and your level of earnings. Most schemes require a minimum period of service before you can benefit and usually pay your full salary for a set period, followed by half pay.
Statutory sick pay (SSP)
In the absence of employee benefits, many workers have to rely initially on Statutory Sick Pay (SSP). This is paid by employers for up to 28 weeks at a rate of £88 a week - a shortfall of £325 week for the average earner and equalling £9,000 if you’re off for six months*.
If you’re lucky, you can fall back on savings, although the Money Advice Service revealed last year that 40% of working-age adults in the UK - 16m people - have less than £100 in savings.
Sickness and disability benefits
If you are sick or disabled, you may be entitled to a number of benefits and tax credits. To apply for some benefits you will need to undergo a face to face assessment and provide supporting evidence, and the application process can take weeks or even months. Criteria can be strict and, depending on your salary, there is a strong chance that even maximum benefits won’t be as much as your usual income.