Income Protection is sometimes described as the glue in a financial portfolio. The most devastating impact on your financial situation is likely to be caused by a loss of your income, and the inability to replace it.
Unfortunately, people lose their jobs from time to time. However inevitably what tends to happen is that these people pick up new roles elsewhere or take a new path in their careers. As a result, their income may drop for a period of time, but will usually pick up again before too long. These people are in the fortunate position of being able to work.
Being unable to work because of illness or injury is a whole other matter. Little or no costs are moved from your life, in fact new costs may emerge such as medical expenses, care fees etc. On the income side, there are social protection benefits available, but in reality these deliver no more than basic subsistence payments. So there is often a lot less money coming in, with sometimes more going out…
Income protection protects your most important asset in the event of illness or injury – your income. And yet at the same time, it still doesn’t find its way into everybody’s financial portfolio.
Your most important asset?
We have just reviewed some very insightful research carried out by Friends First (now part of Aviva) among Irish consumers that shines a light on this issue, with some very interesting findings. First of all, when asked to rank their financial assets in order of importance, the findings were,
Our home (67%)
Our savings (57%)
Our pensions (48%)
Our income (43%)
While the findings might not be surprising in that we all have an emotional attachment to our homes, without their income, these people will lose all of the other assets (maybe bar their pension). Your income is the enabler of all of the other assets, and therefore is the most critical one to maintain.
How long could you cope?
The research then went on to ask how long employees could cope without their income where they are reliant on social protection, using their savings and maybe selling some assets. The findings here were startling when compared to the reality of income protection claimants.
44% of people said they could cope for 3-6 months only.
30% said they could cope for between 6 months and a year
Less than 8% said they could sustain themselves financially for 2 years or more.
However the average duration of an income protection claim is 6.5 years! And that’s an average, many last longer than that. So while having the foresight to maintain a nest egg to see you through a year or two of income loss is extremely laudable and wise, on its own it just might not be enough.
How much of your income do you need to protect?
This is a really important question. While income protection still enjoys the benefit of tax relief at your marginal (highest) rate, it’s another household expense that none of us enjoy. After all, you’re paying for a benefit that you hope you never collect! It is really important that we spend time together looking at your specific situation, your expenses and how they might be impacted by a loss of income. You want to have enough cover to meet your needs in the event of a loss of income, without paying too much along the way. You need to consider any sick pay schemes that you might have access to through your employer, as these might impact the cover levels and cost of a policy to meet your needs.
When asked by the researchers, two thirds of respondents felt that they would require a replacement income of between 50% and 75% of their current income levels. Just over a quarter felt that they would need to protect between 25% and 50% of their income, while 7% felt they would need a replacement income of less than a quarter of their current income. It may be that this last group are approaching retirement and/or possibly their incomes are significantly in excess of their expenditure. Otherwise they may be a little unrealistic about the level of income they would need to replace!
How much replacement income would you need?
We all have a range of financial challenges; making our money go further today, investing wisely, saving for retirement and protecting our main assets. In addressing this final one, never underestimate the value of your income – it is the one single asset that you really can’t live without