How would an accident or illness derail your future plans?
Many of us have life cover that will pay a lump sum on death so that mortgage debt can be paid off and ensure loved ones are not left financially exposed but what if the more likely event of having a serious accident or illness prevents you from earning a living?
You’ve worked hard to get to where you are now and have (hopefully) built up financial assets that will support you in retirement. You are also either reducing mortgage debt through regular repayments or have a savings vehicle in place that will pay off the outstanding debt when the mortgage term finishes.
But, unless you are working through choice rather than necessity, your future financial security will be dependent upon you continuing to save for the long term and reducing debt. This will require you to keep working until you reach the point of financial independence.
A serious accident or prolonged illness that prevents you from working for an extended period of time will, therefore, have serious ramifications, not just for your ability to meet your current living costs but your future lifestyle too following a period of lost savings.
One of the first rules of financial planning is to establish an emergency fund; a savings account with sufficient funds to allow you to continue to meet essential expenditure should you lose a source of income you are reliant upon. This will act as your first port of call.
Beyond the emergency fund, you should also consider a life assurance policy that replaces earned income should you be unable to work. Known as income protection or private health insurance the policies will pay out a regular income for as long as you are unable to work, even if you are unable to ever return to work.
It may be that your employer provides membership to a scheme for all employees, either automatically or optionally as part of your flexible benefits package. If you are employed check first that this would be an option, otherwise a personal policy will be the route to take.
Insurers want the claimant to have an incentive to return to work so it is not possible to replace earned income in full; the limit is typically 50%-60% of salary or dividend income (if there is a sufficient record)but 60% is considerably better than nothing.
Providing specific details of premiums is hard because it depends on a number of factors:
- Likelihood of a claim (e.g. age, job type, leisure interests)
- Level of income to be replaced,
- How long the policy term is to be,
- Whether the benefits when paid are to increase each year or remain static,
- Whether benefits will need to start immediately on the claim being made or whether savings can be used in the short-term.
- Level of health and smoking habits and,
- the definition of your occupation (see below).
Like buying a car, the more ‘options’ you choose, the more expensive the premium. If you are young, want an annually increasing benefit that covers you until 65, you want the payments to start from day 1 of a claim and you have an unhealthy lifestyle in will cost more than someone who is looking for a shorter term, doesn’t need the benefit to increase, is in good health and earns less.
“But They Won’t Honour a Claim”
There is a perception that insurers will be happy to take the premiums but won’t honour a claim that is made. Fortunately, this is a false impression, the largest insurers have a very high claims record. According to stats from the ABI average pay-out rates across the protection industry is nearly 98% and 90% for income protection policies specifically.
Like any form of insurance, if the claimant has given false or misleading information in the application process or at the point of the claim then the insurers are within their rights not to provide any benefits.
Own occupation, Suited Occupation or Any Occupation Definition
An important difference in the ability to successfully claim an inability to work is the definition of ‘work’ in the policy terms.
The most comprehensive cover uses an ‘own occupation’ definition, which, as the title suggests, is suffering an illness or accident that prevents you from carrying out your own occupation. A stress-related illness may impact someone in a senior position returning to a high-pressure working environment.
The ‘suited occupation’ definition would require an illness or accident preventing you from carrying out a job role to which your experience and qualifications are suited. It is, therefore, less comprehensive than ‘own occupation’ but more so than ‘any occupation’.
The ‘any occupation’ definition is the least comprehensive and would only pay benefits if the claim is serious enough to prevent the policyholder fulfilling any type of paid work, even if it is an occupation not connected to their career. The senior manager suffering from depression may not be able to return to the job role but could do something much less stressful (and lower paid).
You may consider an income protection policy to be an extra cost that you don’t need. However, the cost of not having any cover could be much greater than the monthly expense. Like any form of insurance, it will be a waste of money if you never claim but potentially the best financial decision you make if you do.
For many, the peace of mind knowing they have cover is worth the monthly premium alone.
As with any aspect of personal finance, income protection should be considered in the context of your current and future plans. If you would like to consider how you protect your current and future lifestyle contact me.