News details
Protect your income and secure your financial future
3/9/2010
Alok explains why we should make income protection a priority in our financial planning.
Now is the ideal time of year to give your financial cupboard a spring clean, and to think about the importance of income protection. Interestingly, if there was a magic money-making machine which could take care of our mortgages, bills, petrol, food and pension, we would undoubtedly insure it. However, even though we are that machine, we don’t spend nearly enough time thinking about what would happen to us and our families if this machine stopped.
Statistics show that one in five of us will have to take at least three months off work due to accident or sickness before retirement, so it is very worrying that less than 10% of people in the UK have income protection to cover their living expenses should they become unable to work.
There are many common misconceptions about income protection. Some people think that they can manage on state benefits, whilst others assume they can’t afford it. Many people think that they can live off their savings. Even some financial advisers are guilty of not promoting benefits to clients as they find the process too long-winded.
Statistics show that only 15% of people would get by without financial difficulty should they find themselves out of work due to an accident or illness, and an average person’s savings would run out after just 52 days.
It can be dangerous to assume that the state will take care of you should you find yourself in this unfortunate situation. Approximately 2.6million people in the UK claim Employment and Support Allowance and the current weekly allowance is only around £85 per week, which does not stretch very far at all.
Many of us can’t afford to rely on employer sick pay either. Employers are only obliged to pay out Statutory Sick Pay of just over £75 per week for up to 28 weeks and many small businesses only provide this basic allowance. Public sector workers are better off, with many employers in this sector providing six months full sick pay and six months half pay, but these workers still need to think about what happens after that and whether or not they will have a role to go back to.
If you’re self-employed, it’s important to think about what will happen to your business if you don’t have income protection and have to take time off. Can you afford to pay for someone else to take care of your business in your absence?
Income protection policies provide cover for at least 75% of a person’s salary. They pay out a tax free amount within a certain period from being off sick, which can be anything from one-day cover to 52 weeks, and people will pay a higher premium for plans that pay out earlier.
Some companies also offer an investment element to the premiums, where you benefit from a share of the company profits, and have something to show for your money should you have no reason to make a claim. Always seek guidance from an Independent Financial Adviser before embarking on any kind of income protection policy.
To illustrate how cost-effective income protection is, a male non-smoker aged 30 at his next birthday earning £20,000 per year, working as a civil servant in a clerical role, would receive a monthly payment of £1222 per month if he had an accident or became sick and unable to work for longer than one month, through paying a premium of just £41.12 per month. Payments would continue until he recovered and returned to work. If he died, the policy would reach its term and end.
As you can see, there are far more reasons to take out income protection than to risk the financial future of you and your family, so make an appointment to see an Independent Financial Adviser today to talk through the best options for you.
For further information on how Alok can help you with your personal or business planning needs, contact Dhanda Financial, 52 Dean Street, Newcastle upon Tyne, NE1 1PG, telephone 0191 255 8960, or email alok@dhandafinancial.com.
