There are two sides to financial planning but their level of profile is vastly different.
The “aggressive/growth” side, if you will, is the part that features more prominently, focusing on enhancing wealth.
The second, equally as important but too often the wallflower, is the ‘defensive’ side, which is focused on preserving and protecting wealth. Which is where income protection insurance (IPI) comes in, sadly one of the most undersold insurances relative to its need.
Income protection is to some degree required by most families where the main monetary source of income is a salary. Were one of the breadwinners be unable to work, everyone would suffer.
Yet, according to some estimates, just seven per cent of the workforce are protecting their income.
Whatever your circumstances if potentially you might face being unable to pay the bills, you should consider taking income protection insurance out.
You are most likely to need it if you’re self-employed or you have a mortgage.
Statutory sick pay in the UK stands at just £89.35 a week for up to 28 weeks.
There are two main types of income protection – short-term, sometimes known as accident, sickness and unemployment (ASU) policies, which tends to only pay out for one or two years, and long-term, which provides a regular income if you are unable to work due to illness or disability, lasting until you are well enough to return to work, retire, die, or the end of the policy’s term is reached, whichever is the sooner.
Policies are designed to protect up to 70 per cent of your gross salary.
There is often a waiting period before the payments start – you generally set payments to begin after your sick pay ends or after any other insurance stops covering you.
So how much does it cost?
Go onto the internet and you will see plenty of enticing offers – cover from 44p per day, cover from 69p per day, and so it goes on.
But the actual figure will depend on many things – your age, job, whether you smoke or have previously smoked, the percentage of income you’d like to cover, the waiting period before the policy pays out, the range of illnesses and injuries covered, and your general state of health.
Some people don’t need IPI. You may be part of an employee benefits scheme which gives you an income for 12 months or more. If you’re unable to return to work you might be entitled to take your pension early and retire. You have enough savings to support yourself. Your partner or family would support you.
But the fact is that nearly one million people a year are off work long-term sick. The most common causes are stress, mental health and musculoskeletal injuries. Musculoskeletal injuries are particularly common for manual workers, while stress is more common for non-manual workers.
Families are not benefitting from IPI for a variety of reasons.
Owing to optimism bias, it is common for individuals to underestimate the likelihood of an accident, illness or injury befalling them. In addition, deteriorating disposable income is affecting a large proportion of the populace, and insurance costs are often one of the first to fall by the wayside. Whilst previously many people were part of a group IPI scheme with their employer, nowadays companies are looking to reduce costs and IPI can be seen as an unnecessary luxury.
A lot of focus is put on regular savings and investments – which are still important – but protecting income in times of hardship, specifically through injury or illness, is potentially more important.
A small price to pay for peace of mind.