We are now living in unprecedented and difficult times. Covid19 has highlighted to us all the impact that elements out of our own control can have on our livelihoods and standard of living. During these periods, we believe it is important to reflect on, and review, your own financial circumstances to ensure that you have the right protection in place. Below I have covered off two elements of protection that we look at when discussing protection with our clients:
For the vast majority of us, our mortgage is our greatest liability, with the mortgage repayments typically being our largest monthly outgoing. Whilst we all hope that the worst would never happen to us, statistically speaking, there are four events that could occur during our working lives – sickness, unemployment, redundancy, or death.
This “unknown” is one of the reasons why we believe it to be of upmost importance that appropriate mortgage cover is in place to ensure that your mortgage can be cleared in the event of death or diagnoses of a serious/ critical illness (e.g. cancer, stroke or brain injury). In either event, a lump sum payment would be made that could be used to help clear any outstanding mortgage liabilities, meaning that your family would not need to worry about having to keep up with the monthly repayments, or having to downsize – giving you all one less thing to worry about during what would be an extremely difficult time for all.
Importantly, mortgage cover does not have to be expensive. As an example, a 35-year-old couple with a £200,000 mortgage would each have to pay £34 per month to cover them over a 20-year period, with this inclusive of both life cover and earlier critical illness cover. This is less than some mobile phone contracts.
Whilst most of us will remember to insure items that are of great worth to us (e.g. our home, car, and mobile phones), surprisingly, most people forget to insure their biggest asset – their income! Without this, you would not be able to pay for all of your other insurances, direct debits, or as discussed today, your mortgage repayments.
Whilst those who are employed are eligible for Statutory Sick Pay, please remember that this is designed to provide a low level of income in order to encourage claimants back to work (with this currently paying £95.85 per week as of 2020/21). Furthermore, this is only payable for up to 28 weeks. As I am sure you would agree, it would be very difficult to be able to survive on £95.85 per week during these modern times, which is why we believe it is crucial to look at ‘Income Protection’.
Ask yourself, what would your financial situation look like if you could no longer work as a result of illness or injury? Do you have sufficient income elsewhere that can be used continue to meet your monthly outgoings? Do you feel that you already have sufficient cash savings (between three to six months) to fall back on? What would you live on once your savings are all spent if you are still unable to return to work? One solution to these questions is Income Protection.
Income Protection is designed to pay out a monthly, tax-free ‘income’ to you as a result of an accident, illness, or injury, that can effectively replace your lost income as a result of not being able to work. Typically, these policies will pay up to 60% of your monthly earnings, ensuring your main bills are covered, with this payable after an agreed deferral period (e.g. 4-52 weeks). This would remain payable to you until you are able to get back to work, or until the end of the policy term, should you be unable to work again. Importantly, you can claim as many times as necessary during the policy term, with most providers now recognising mental health conditions. For these reasons, we believe Income Protection to be just as important as life and critical illness cover.
If you are self-employed, your business is likely to be highly impacted even after a short period of incapacity. Income Protection is not just for the employed, it is also designed to help those who are self-employed and there are suitable policies available with shorter deferral periods.
It is worth noting that Income Protection does not have to be costly. As an example, the cost to implement an increasing Income Protection plan for a 35-year-old male earning £35,000 per annum would be approximately £40 per month. Should they then become seriously ill, or have an accident that leaves them unable to work again, they could claim through their Income Protection and would receive an increasing monthly benefit of £1,750 per month, tax-free, until they reached their 68th birthday.
“Whilst we cannot control what may happen to us, we can at least plan for these events and set up suitable provision to provide us with an element of protection.”
As a regulated and independent firm, we will search the whole of the market to find the most suitable and cost-effective solutions that fit your budget and needs. We are able to obtain competitive rates and are not tied to any particular insurance provider(s). Should you wish to speak to one of our Financial Planners about how we may be able to help, please get in touch with your usual Cave & Sons contact.
Cave & Sons Ltd is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715. Tax and Estate Planning services are not regulated by the FCA.
This communication is for general information only and is not intended to be individual product/investment advice, tax or legal advice. The views expressed in this article are those of Cave & Sons and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. You are recommended to seek professional regulated advice before taking any action.