Importance of Income Protection as Long Term Health Issues Rise

In the UK, the spike in cases of long-term illness and the subsequent rise in economic inactivity, requires a focus on income protection measures to reduce the financial impact of chronic health issues. Recent ONS research has found that a distressing third of the population is grappling with a chronic health condition, pushing approximately 2.5 million into a position where work becomes impossible.

Key Points:

  1. Long-term illness has led to rising economic inactivity, making contingency planning crucial for all.
  2. It’s important to evaluate employer’s sick leave policies or consider personal income protection.
  3. There is a disparity in coverage amongst various demographic groups, with lower earners, young, and self-employed people less likely to have adequate protection.
  4. Maintaining an emergency savings fund that can cover 3-6 months’ worth of essential expenses is crucial.
  5. Adequate planning for retirement, including considering potential early retirement due to ill-health, is an essential aspect of financial resilience.

Understanding Income Protection

Income protection is a type of insurance policy that comes into effect if you are unable to work due to illness or injury. It provides regular payouts, usually a percentage of your usual income, until you are able to return to work or until the policy term ends.

Unlike a lump sum payout policy, such as life insurance, income protection ensures a steady flow of income to cover daily living expenses and maintain your financial stability. This valuable financial tool serves as a safety net, offering peace of mind in uncertain times.

A Necessity for Plan B

An essential takeaway from these unsettling statistics is the absolute need for a well-considered plan B. No one likes to dwell on the possibility of falling ill, yet the numbers suggest a dire need for preparedness. This involves understanding what your employer might offer in terms of sick leave and income protection for more extended illnesses.

If these benefits fall short of what you may require, turning to personal cover—such as personal income protection—can bridge the gap. This form of insurance can cover a portion of your income for a specific duration if you find yourself too ill to work.

How Illness Protection Cover Varies

However, it’s not all doom and gloom. The HL Savings & Resilience Barometer brings a glimmer of hope, revealing that 77% of people have adequate cover in place. But it’s a different story for the self-employed, lowest earners, and those aged 20-24, with coverage dropping to 33%, 23%, and 62% respectively.

Coverage for Specific IllnessPercentage of People
Personal Income Protection77%
Critical Illness Cover22%
The percentage uptake of those with various forms of income protection

Critical illness cover could be another worthwhile consideration. This cover provides a lump sum payout on the diagnosis of specific illnesses. Yet, only 22% of the population have this insurance, and it’s primarily concentrated among the top two income brackets.

A professional giving income protection advice to a couple

The Safety Net of Emergency Savings

If you find yourself unable to work for an extended period, having a savings safety net can prove to be a lifeline. Ideally, workers should maintain three to six months’ worth of essential expenses in an easy access account. However, the barometer shows that while almost two-thirds of us (64%) have enough emergency savings, lower earners, singles, and younger individuals are more likely to fall short. Among those aged 20-24, only 31% have adequate savings, and among those aged 35-39, the percentage rises to only 56%.

The low level of savings amongst younger people could result in debt problems, should they unfortunately encounter long term health problems that prevents them from working.

Pension Considerations in Case of Early Retirement

Illness often brings with it the unfortunate possibility of an early retirement. This necessitates evaluating your pension and determining whether it could stretch to cover an earlier than planned retirement. Our barometer reveals a concerning trend—only 39% of households are on track for a moderate retirement income, a drop from 42% just six months ago.

Household Retirement PreparednessPercentage
On Track for Moderate Retirement Income39%
Off Track for Moderate Retirement Income61%
The percentage of households prepared for a moderate retirementent income

Taking the Next Steps

Facing this predicament head-on instead of panicking is the key. Perhaps you could boost your pension contributions, ensuring a more secure future. If this isn’t possible now, consider prioritising your pension the next time you receive a pay rise or a lump sum.

Exploring other assets at that stage could also be a good idea—you might need to dip into savings or even your property’s value. While this might not be ideal, it could prove to be the best possible outcome in undesirable circumstances. It’s essential to remember that it’s not just about surviving such circumstances—it’s about thriving in spite of them.

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