Eight in ten homeowners could be at risk if their income stops

14th May 2019 by James Etheridge

There are many reasons why your income could suddenly stop and it’s not a situation we want to think about. However, planning for potential scenarios means you’ll be in a better position financially and practically should they happen. Despite this, more than eight in ten homeowners who are stilling paying a mortgage haven’t taken out a protection policy, according to a report from Royal London.

Often a big life event is a trigger for considering taking out an insurance policy; purchasing a new home or having children are the most common reasons. But even before these milestones, losing your income is likely to have a significant impact on your lifestyle. You may not be paying a mortgage, but could you pay rent and meet other financial responsibilities if you were out of work for six months? What changes would you have to make to your lifestyle? If you’d be financially vulnerable without your income, you should consider the pros and cons of protection products.

The State of the Protection Nation report from Royal London found:

• 60% of mortgage payers have Life Cover, which would pay out a lump sum if they die
• However, less than one in five have taken out Income Protection to provide security if they were unable to work

The research indicates this apathy may come from an ‘it won’t happen to me mindset’. The research found 46% of people feel they are unlikely to go on sick leave for three months or more and 44% felt they were unlikely to have an accident that meant they’re unable to work. But the truth is, illness and injury can and does happen.

A male thirty-year-old has a 26% chance of being off work for more than two months before they reach the age of 65. For women, it’s higher at 37%. It’s a figure that’s likely to be higher than expected by those who don’t believe they’d benefit from Income Protection.

Of course, there are alternatives to Income Protection. You may be employed by an organisation that offers a generous sick pay scheme or have enough in an emergency fund to cover expenses. However, it’s important to check how long these would last for and consider the sense of security they’d provide. An Income Protection policy that complements existing safeguards can improve your wellbeing.

An Income Protection policy will make regular, pre-defined payments to you, should you be unable to work for an extended period of time. It could cover either a set time frame until you either return to work or retire. It’s a precaution that can give you peace of mind.

If you think you could benefit from Income Protection, there are many different policies available and some key areas to check to ensure you choose the right one for you.

How much will it pay out?

One of the crucial elements for understanding how Income Protection will help you is checking to see what it would pay out.

Usually, Income Protection products pay out a portion of your current income, for example, 60%. The higher the payouts would be, the more the premiums will cost. You should take some time to understand your essential outgoings here, such as mortgage or rent repayments and utility bills. This gives you an understanding of the level of income you’d need to maintain if you were off work for an extended period of time.

What will it cover?

Before you proceed with any Income Protection product, you should ensure you fully understand when it would pay out. The majority would provide a set income should you become too ill or involved in an accident that meant you couldn’t work, with evidence provided. Checking this now means you can plan for other eventualities that aren’t covered and you’ll be in a better position should you need to make a claim.

As you’d expect, the more comprehensive the policy, the more likely it is to cost more. However, this isn’t always the case so it’s always worthwhile carefully checking each policy and comparing it to others.

How long would the policy pay out for?

Long-term policies will typically pay out until you either return to work or retire. However, there are shorter-term income protection products that will only pay out for a defined period, for instance, a year. A shorter-term policy will mean lower premiums, but could also leave you financially struggling if you were unable to work once the cover had finished.

What’s the term length?

This covers how long your policy will last for. This will depend on your priorities. If continuing to meet mortgage repayments is your main concern, you may choose a term length of five years if this is when you’ll have cleared the debt. If you want reassurance throughout your working life, you may choose a longer expiry date on the policy.  

What is the deferred period?

Income Protection products don’t pay out immediately, there will be a deferred period. Typically, the longer the deferred period, the cheaper the policy is. The most common waiting period before Income Protection starts to pay out are four, 13 or 26 weeks and a year. You should consider your personal situation when deciding on a deferment period. Someone who receives sick pay from an employer for six months and has savings to fall back on may opt to defer for a year. If, on the other hand, you’d be reliant on Statutory Sick Pay, currently £94.25 per week, you may want it to pay out after just four weeks. 

Income Protection can form part of your wider financial plan and security. We’re here to offer advice and support should you need it when considering how you can safeguard your wealth and lifestyle, please get in touch to learn more.