How you're jeopardising your financial future

Millions of workers are opting out of company life insurance schemes - a decision that could see them risk their financial future for the sake of a few pounds.

British workers are increasingly neglecting employee benefits such as life insurance, as the squeeze on our disposable incomes gets ever tighter. A new report from corporate life insurance firm Unum shows that UK workers are increasingly opting to swap membership of employee benefit schemes for lump sums of cash.

The Unum report found that more than one in three (38%) UK firms have seen their workers choose to opt out of life insurance and pension schemes, as the widespread freeze on salaries and bonuses take its toll on our take-home pay.

It’s little wonder people are opting to seize quick cash where they can. Figures released this week from think tank the Centre for Economic and Business Research found that average disposable incomes shrunk for the ninth month in a row during September, with the average family worse off by £4 a week compared to a year ago.

And the squeeze on our incomes is set to tighten still further in the wake of the widespread spending cuts - likewise the prospect of future job losses. With that in mind, the initially understandable decision to trade cover for hard cash may actually be akin to playing Russian roulette with your financial future.

What you’ll get without cover

A staggering 58% of UK adults have no life insurance in place at all, according to recent figures from insurance company Scottish Provident. The survey found that in the event of a financial catastrophe such as serious illness or job loss, 31% of people would lack the means - such as insurance or savings policies - to cope.

If you were to suffer a serious illness, in most cases you could only expect to receive your full salary for a month at most - if at all - before picking up statutory sick pay for up to 28 weeks of £79.15 a week. If you were to lose your job, you can expect a one month’s notice pay at full salary then between one and one-a-half week’s pay for each full year of service. After that, you would have to apply for unemployment benefit.

You can calculate any redundancy payout at the Directgov website. Rest assured it will make bracing reading - particularly if you have outstanding mortgage and credit card debt.

Life insurance - and what it gives you    

If you’re an employee, you should typically have access to some form of so-called “group risk” life insurance benefit, such as an income protection policy, critical illness cover or life insurance.

The most widespread employee benefit is income protection insurance - 98% of UK companies have provision to allow staff to insure their mortgage repayments and other commitments in the event of illness or disability. This type of cover will cover essentials and pay out a proportion of your salary (between 50% and 60%) over the long term.   

Alternatively, critical illness cover pays out a tax-free lump sum if you’re diagnosed with a serious illness specifically covered by the policy.

If your employer is one of the 93% of those in the UK to offer employees a variant of life insurance that pays out in the event of death (sometimes with additional serious illness cover), it can be worth signing up for that instead.

Figures from specialist life insurers Lifesearch show that the beneficiaries of the policyholder would typically receive a lump sum four times their annual salary in the event of a claim. In real terms, the payout varies according to salary and policy length - for someone earning an annual salary of £30,000, a standard policy would pay out a lump sum of £120,000 to the beneficiaries.

These sums dwarf the lump sums workers are currently exchanging insurance policies and pensions for. So, ask yourself - do you want to take the risk?

Recent question on this topic

• englishman999 asks:

  My wife and I have critical illness cover paying the mortgage, it costs £121/month. About to pay mortgage off what cover do I neeed?

  • 
    JoeEasedale answered "If your critical illness cover, which is now paying the mortgage, will it continue to pay out if..."
  • 
    englishman999 answered "Yes, will pay out even if mortgage has been paid off fully. Amount of pay out decreases over time -..."
  • Read more answers

If you don’t have a company scheme    

If you’re self-employed, working part-time or don’t have access to a company scheme, don’t despair - you can still get access to good quality protection at a reasonable price.

What you can expect to pay will vary according to your age, sex, health status and whether you’re a smoker - but a young and generally healthy non-smoker can expect to enjoy good quality cover for under £10 a month. You can get a free no-strings quote with our life insurance search.

Before you sign up, think about the type of cover you need. Life insurance is more suited to people with families and dependants, while critical illness cover and income protection policies are equally valid for single people. You can, of course, take out more than one type of policy.

Lastly, it’s worth doing a few sums to ensure you take out enough cover to meet your commitments - it’s no good to have £100,000 worth of cover if you have more than that outstanding on your mortgage. Use our life cover calculator to help you work out what you'll realistically need. 

Compare quotes using the lovemoney.com life insurance service

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