When organising insurance, don’t forget about the importance of protecting your earnings.
From our possessions to our holidays, most of us have plenty of insurance plans in place. However, while we’re quick to insure our belongings, we’re all too often slightly short-sighted when it comes to protecting the income that funds them.
“It’s human nature,” explains Chelsea Collins, Third Party Protection Relationship Adviser at St. James’s Place Wealth Management. “We understand that someone might break into our house and steal our wedding ring, but we can’t envision things happening directly to us.”
Of course, this applies to men as well as women, but women – especially those who aren’t working full-time – may not recognise the value of their contribution to household finances.
The value of your role
“Think about what would happen to your childcare bill if you weren’t around to pick the children up after school. This is where the misconception comes from, because everything we are doing for free has a cost to replace,” says Collins.
“Let’s say you sustain an injury and have an operation that needs you to recuperate for 12 weeks. With sick pay from work unlikely to cover you for this long, how would you cope without your income, doing the shopping and looking after the kids?”
What’s the risk?
When it comes to insuring ourselves, our focus is very often on life cover to repay the mortgage if we die and critical-illness cover to protect us in the event of life-threatening illnesses, such as cancer or heart disease.
However, the reality is that we are much more likely to be off work for an extended period because of ‘everyday’ conditions, such as a bad back or work-related stress. Indeed, according to insurer LV=, mental-health issues and musculoskeletal problems (including injuries and fractures) together account for more than half (54%) of claims. Cancer comes in third, accounting for just 15% of claims1.
Collins adds: “We struggle to understand that, first and foremost, you are a lot less likely to die or contract a critical illness while you are at the peak of your earnings in life. You’re much more likely to suffer a minor injury such as a broken arm or need an operation that keeps you out of work.”
To help you get an idea of the risks facing you and the relative likelihoods of certain events happening to you, Collins says it can help to explore online ‘risk reality’ calculators.
Take the example of a 40-year-old non-smoking woman: according to the St. James’s Place calculator, she has a 32% chance of being off work for two months or more, but just a 10% chance of suffering a serious illness and only a 4% risk of dying before she retires.
“A lot of the time we see a complete reversal of people’s expectations, and that’s why in financial services we tend to say income protection first, then look at critical illness and life cover, as death is so much less likely,” says Collins.
Won’t my employer pay me if I’m sick?
Although some employers offer generous sick-pay schemes, they aren’t guaranteed and this means many employees will be reliant on statutory sick pay (SSP). This is currently paid at a rate of £95.85 a week for a total of 28 weeks and will leave many claimants still struggling to pay the bills.
How can income protection help?
Income-protection policies pay you a substitute income if sickness or an accident leaves you unable to work for a while. It doesn’t replace your full salary, but it can cover as much as 60% or 70% of it to ensure you can still afford the essentials.
Although the expense can be a deterrent, there are ways to reduce the cost of this vital cover. You can opt to cover a lower proportion of your salary – perhaps just enough for your mortgage – or choose a policy that pays out for only a year or two, rather than one that pays out until retirement.
The added value of advice
You can buy income protection direct from insurers, but it makes sense to get advice. In addition to helping you run a policy alongside SSP benefits or an employer sick-pay scheme, they will also be able to recommend the right combination of other policies, such as critical-illness or life cover.
“They will ensure you get the correct level of cover and that it fits with you and your lifestyle,” says Collins. “You may also be able to access other benefits that aren’t available if you buy direct, such as a second medical opinion, helplines or counselling and physiotherapy.”
If you would like to talk to a St. James’s Place Partner about income protection, just ask.
1 LV=, What are the most common types of income protection claim you pay?, 2019
To discuss protection planning with a member of the AAG team, please leave your details below.