In recent years there has never been a more important time for people to take charge of their finances and manage their money better. With the volatile and unpredictable global economy, the sharp drop in UK household incomes and uncertain employment patterns are creating the greatest concern for families right now. Therefore having financial provision and financial protection for their everyday needs as well as the unexpected, is even more of a necessity.
This comes at the same time when there is a change in the nature of the relationship between the individual and the traditional functions of the welfare state. This has been brought about by the Government making progress with its reforms to promote work and personal responsibility. It is inevitable that more responsibility will be required of the individual to provide a financial safety net for themselves and their family.
It is great concern of the UK Government that in this time of high unemployment, people who do not have enough money to pay their bills may become a burden on the State or even turn to crime. Anyone out of work and looking for a job needs some money to fall back on until they are earning again. Equally those 'breadwinners' who cannot work, perhaps due to a serious injury or long-term medical problem, quickly find themselves and their families in serious financial difficulties. With State Benefits being cut back and harder to obtain, there is a growing need for men and women, especially those with families, to protect themselves from these financial shocks.
As a response to this the Government set up an independent steering group chaired by Carol Sergeant. It published its interim report this year to explain how consumers could better engage with what can be a complex financial services market. It identified a section of the UK population that is both particularly at risk and yet also have the resources to protect themselves from these feared financial shocks. They are people who 'have some savings but less than three months average income'. Typically with a median income of £21,788, which is £5,447 for a median level of three months savings. In the UK this is 6.9 million households or 14.1 million adults.
If any one of these 14.1 million adults had a medical problem and became too sick to work, they would be in trouble financially. Equally, with just three months wages saved, if they lost their job and could not get back into work for six or more months (six to eight months unemployment is the average) they would face financial meltdown.
For long-term sickness or disablement that prevents the wage earner returning to work for several years if at all, the numbers who would be affected are appreciably higher. Nearly one in three UK households could not cope if they lost their main income. The report identifies that there are 12.2m households or 23.5m adults who should have some form of income replacement or risk slipping into poverty.
They see a simple and straightforward insurance policy as the answer to short-term financial shocks for people who simply cannot afford to save significantly. However the number jumps up to over twelve million households if the main breadwinner could not work for a very long time if at all. This inevitably would no longer be redundancy related but almost certainly result from a disabling accident or a long-term illness.
A strategy for the savvy consumer
There are 14.1 million adults who should take out a policy that will pay them out for up to a year if they are unable to work due to accident sickness or unemployment. This cover can be bought for £20 to £40 per month on-line or for more through a broker. It is often called sort-term Income Protection Insurance or Lifestyle Protection Insurance. Most also pay out if the policyholder has to give up work to look after a close relative.
The same 14.1 million adults, plus another 9.4 million who are wealthier, should take out a long- term income protection insurance policy. Available mainly through financial advisers, this cover is far cheaper to buy with a 1 year excess (or deferment period as it is often called).
The savvy consumer would have a one year Lifestyle Protection Insurance policy that included unemployment and carer cover. When this was exhausted their long-term Income Protection policy would start paying out for medical related disability.
What are the advantages of this? First and foremost it enables the individual to sleep at night knowing they are covered if the worst happened. They can also afford to live for the here and now, going on holiday, buying treats for their children and meeting everyday expenses. The alternative, building up personal savings, would demand saving virtually every last penny they earn. In comparison, perhaps finding £50 or so a month to pay for both types of policy, would not be too difficult to find. It compares favourably with the cost of a monthly satellite TV subscription, smoking or a single top up at the petrol pumps.
Dennis Haggerty FCII M IDM Marketing Manager iprotectinsurance.co.uk specialises in low cost on line Unemployment Insurance, Lifestyle Protection, Income Protection and Mortgage Protection Insurance.