I know that normally I talk about investments, I try to sneak in DB pensions as much as I can and I bash certain large IFAs a bit in my articles but I wanted to address a rather personal issue this month, protecting my most valuable asset ever!
I donâ€™t mean my two sons, that goes without question that they are everything to me. No I am referring to the most financially valuable asset ever.
Not my house (and if you saw the leaky conservatory youâ€™d question whether it is the most valuable and if anyone knows a trustworthy trades-person let me know!)
I am talking about me.
Good old Niel Gavin, T&C Director @ IFAC.
Now many advisers will recommend mortgage Life Cover, Life Cover for family protection, even critical illness but few address the far more worrying and larger risk, the loss of income.
I am talking here about someone (whether they are single or have dependants, it doesnâ€™t matter) who works, employed or otherwise. Let me show you my thinking here:
Let us say that someone earns a humble Â£30,000 a year and that for the purposes of my article Income tax particulars remain unchanged (I know they will likely change but have you tried to programme excel with 4 variables, headache!) this would give them a take home pay of approximately Â£1,995 each month, letâ€™s then assume that grows by 2% inflation every yearâ€¦..
Over the course of 30 years that person is worth a staggering Â£1,058,795.09!
Never mind pay rises, bonuses, promotions etc. Thatâ€™s a lot of cheddar!!
So if that person was unable to work through illness or injury (and it wasnâ€™t a critical illness) what would they do?
Theyâ€™d end up on SSP and remind me what thatâ€™s worth I hear you say?
Â£94.25 maximum for only 28 weeks! So thatâ€™s a whopping Â£2,639 off the Â£1,058,795.09
What about Universal Credit then? Surely that will ride to our rescue here?
Nope! If you qualify for the maximum then it is Â£251.77 per monthâ€¦.
So over 30 years how does this work out?
If you were off now and were aged 37 and your State Retirement Age was 67 then the calculation is as follows:
Total Income Value Â£1,058,795
Less State help Â£91,637
Lost Income Â£967,158
% Income safeguarded 8.65%
So if you do nothing and if you are lucky enough to qualify for maximum State Benefits, then you have 8.65% of your income in the bag! No worries then, go put that kettle on, book that skiing holiday and tell the children that itâ€™s off to St Moritz!!
Hang on thoughâ€¦â€¦thatâ€™s rubbish surely? No-one would ever be satisfied with that scenario?
The reality is that so many are unknowingly at huge risk here, they will insure their car, their holiday, their IPhone but not the one thing that matters so much more than everything else added together, their income!
Thatâ€™s where you come inâ€¦.as their trusted adviser you can really make an important difference to them, you can show them how to protect this enormous asset easily and in this case you really are giving them peace of mind.
What can we do to protect our income if we donâ€™t die or get cancer?
We can save like crazy and build up a huge savings buffer but in reality who can actually afford to do that, living gets in the way in the meantime.
We can get ourselves an Accident, Sickness and Unemployment plan and this can fulfil a narrow need but should not be dismissedâ€¦.
Obviously I am not even going to mention PPI!
ASU will provide limited cover of typically 12 months, this makes them very cheap and easy to sell in reality but their value is very limited of course and if you are self employed then it is unlikely that you will get cover.
Or we can get ourselves comprehensive cover, Income Protection.
Allow me to recap in case some of you are not familiar with the coverâ€¦â€¦
Income Protection (Permanent Health Insurance as it used to be called) is designed to cover a certain % of your annual earnings (typically 60%) in case you are unable to carry out your own profession due to illness or injury.
The key here is that it is for any medical absence from your own profession.
Now these plans are fully underwritten and so it may be that the underwriters exclude some existing conditions or modify the cover but if you are accepted at normal rates then the cover will be against your own job or profession.
The payments are tax-free to you and will continue until you return to work, die or the plan ceases and typically there is no limit to the number of times you can claim. (this is individual cover not group cover mind, the treatment of Group Income Protection is different)
Premiums are waived during a claim and every plan has a Deferred or waiting period of between 4-52 weeks, this is to deter unnecessary claims really and often tied in to the end of an employerâ€™s sick pay scheme.
Now speaking from very personal experience, this type of cover is/was a life saver.
If you look at your take home pay, typically it is between 60-70% of your gross pay (for us normal earners that is!) so having benefits paid out at 60% seems a nice level.
Because it is for any absence from your job/profession, it means that unlike some other covers, including Universal Credit, you wonâ€™t be made to do a lesser job in the meantime.
Benefits can be level of increasing to take account of inflation.
Benefits typically run to a ceasing age to coincide with retirement age in most cases.
According to the ABI, in 2018, 88.1% of claims were paid, with an average claim value of Â£22,058 per year with a total of Â£648,815,000 in benefits paid.
Now there is more to Income Protection than I have mentioned here, including Hospitalisation Benefit and Rehabilitation Benefit for example but in summary what it does is provide long term peace of mind, it is equally valuable to those with dependants as it is the singletons and because the payments are tax-free, it is simple to use.
Yes it can be expensive but do the calculations please, add up your clientâ€™s worth and weigh it against the cost and I canâ€™t imagine for a second that the premiums would come anywhere near to a fraction of that clientâ€™s monetary value.
We are all quick to look at easy advice, mortgage life cover or family protection on death, even critical illness but so rarely do I see advice on protecting the biggest asset most of your clients will ever have, their income.
Do me a favour?
Next time you are fact finding, ask the client what they are worth and see if they can tell you. If they canâ€™t itâ€™s your job to show them what they are really worth to their family or just to themselves, play the selfish card and show them what they could lose if they donâ€™t take action. After all illness and injury is not often cause by the client themselves, no-one deliberately gets cancer or has a stroke in reality or even breaks their leg (that keeps many away from work for anything up to two years typically) and clients can have fancy pensions, investments and plans to save but if they are off long term ill, BAM!
There go those plans to dust.
Prevent this and advise them to protect their income, safeguard their living future not just their dead one!