How long could you survive without any income before your direct debits start to bounce? Warren Shute explains what you need to know about income insurance
The fifth anniversary of the pandemic got me thinking: if you had a goose that laid you a golden egg each month as long as you took care of it every day, fed it and watered it, you’d probably look after it really well, wouldn’t you?
Would you also insure it so that if the goose got sick and stopped laying the golden eggs, rather than go hungry you would have the insurance payments to live off? I would, it makes complete sense. The goose is providing your lifestyle and paying your bills. If you agree with that, let’s try a second question: do you insure your own income?
So many of us are our family’s goose. We wake and go to work all day, we bring home our golden egg each month in the form of our pay cheque. But if we couldn’t work for some reason, what would happen? If we are lucky and work for a larger employer, we may have up to six months of long-term sick pay. But even then, what happens after that if we’re not well enough to return to work? How long could you survive without any income before your direct debits start to bounce?
When we’re not well, we need security, peace of mind and time to allow ourselves to recover. The last thing we need is the stress and pressure of rushing back to work, to pay the bills, if we’re not 100%. And the way we do that is with income protection insurance, which is vital for so many people who have little employer support and have financial commitments to keep.
Income protection insurance will pay out a tax-free income if you’re unable to work because of an accident, or long-term sickness. It becomes payable after a deferred period, also known as a waiting period, which is typically between three and six months. The payments normally continue until you are well enough to return to work, or the policy comes to its contractual end.
Think of it in this way: you’re offered a choice of two jobs which are identical in all ways except one. The first job gives you an annual salary of £37,430pa – the UK’s average salary – but you receive no long-term sick pay benefit. The second earns you the same money but if you’re off work sick they’ll pay you until you can return to work or until you retire.
The one you’d take is a no-brainer, isn’t it? And that’s how to think about insuring your income. Some of the people diagnosed with cancer or a long term illness each day are fortunate not to worry about their finances but the majority are not. As a rule, we don’t like insurances, they’re not exciting to have or to arrange. But we need them, and just like car or house insurance, this one belongs on your essential list.
To learn more about financial planning search for lexingtonwealth.co.uk.
