Protect yourself from the spending cuts

Worried about what will happen to you if you lose your job or fall ill? If you want to protect yourself against loss of income, here's everything you need to know.

In the Spending Review this week, George Osborne announced £7bn of welfare cuts, on top of the £11bn cuts already announced in June. Those on unemployment and disability benefits have been hit the hardest, something we find appalling here at lovemoney.com.

If you’re lucky enough not to have been affected directly – in other words, you currently have a secure income and are in good health -  don’t make the mistake of assuming the cuts can’t hurt you. If you aren’t protecting your income from unemployment and sickness, you could now find yourself in seriously dire straits one day.

Just take a look at how people receiving these benefits have been affected:

• Anyone who suffers a serious illness but then starts to recover will only be able to claim benefits for a year.
• Anyone who lives in a care home won’t get any money to help with their mobility costs – even if they have no feet or legs. Charities have warned this will leave many trapped in their homes, unable to afford to go out.
• Anyone who starts renting an ‘affordable home’ (i.e. social housing) will now be expected to pay up to 80% of market rents. The National Housing Federation has warned this could triple the rents for some properties overnight. (Note: this only applies to new social housing tenants not to existing ones.)
• Anyone who is under 35 and single will be only receive enough housing benefit to cover the cost of a room in a shared house.
• Council tax benefit spending will have to be slashed by 10%, but it’s up to councils to decide how to do it - meaning anyone on a low income or benefits could be targeted.

In summary, trying to survive on unemployment or disability benefits is going to get tougher – and if you don’t take steps to avoid this fate now, it will be too late later.

Income protection insurance

I know many lovemoney.com readers aren’t convinced that insurance policies which protect your income are really worth it.

These policies are often seen as costly for the cover they provide, and littered with exclusions which allow insurers to wriggle out of paying claims. But I still think protecting against loss of income if you’re unable to work is vital, especially now.

Of course, it’s also important that you understand what you’re buying and how you’ll be covered.

Trouble is that’s sometimes easier said than done. What we need is transparency, but that’s in pretty short supply. Take Income Protection Insurance (IPI) and Income Payment Protection Insurance (IPPI) for instance. You could be excused for thinking they are the same thing but, in fact, they are two completely different policies.

True, both are designed to protect your income if you’re unable to work. But that’s pretty much where the similarity ends. Take a look at the table below which summarises some of the main differences between the two:

Income Protection Insurance versus Income Payment Protection Insurance

As you can see, IPI offers the potential for replacing a proportion of your income over the long-term if required. If you become unwell or suffer an injury that’s so severe you’re never capable of returning to work, the payout from this type of policy will continue until you reach normal retirement age.

However, IPI policies vary greatly depending on how much cover you want and how much you want to spend. As I mentioned in the table above, if you choose a short deferment period your premium will be higher. Day one cover provides a replacement income straightaway, but of course this can be expensive. If you can afford to wait for a while -- 13 weeks is a pretty common deferment period -- your premiums will be considerably lower.

Most IPI policies will cover you if you’re unable to do your own job. However, you can make the premiums cheaper by setting up a policy which will payout if you can’t do any job.  But this means while you may not be capable of doing your own job, the policy won’t pay out an income unless you are unable to work in any capacity. This option might not provide cover which is comprehensive enough for you.

You could, instead, go for the middle ground by choosing a policy which covers you if you’re unable to do any occupation which is suitable for you given your experience, training and qualifications.

IPPI, on the other hand, will only normally pay out benefits for 12 months even if you haven’t recovered sufficiently to return to work, or you’re unable to find employment following redundancy.

These policies are becoming very popular at the moment despite the short term nature of the protection on offer. This is simply because a growing number of people are becoming concerned about job safety - and who could blame them?

Remember a claim will only be successful under IPPI if you have been made redundant involuntarily. If you choose voluntary redundancy, you resign or you’re dismissed, you won’t be covered. Be extra careful if you know redundancy is impending when you take the policy out. You risk your claim being rejected later on if you don’t declare it upfront.

So you can see there are some fundamental differences between IPI and IPPI and the type of protection they each provide.

Exclusions, exclusions, exclusions

This is one thing that does apply to both policies. You must check out the terms and conditions so you understand exactly what is covered and any exclusions which apply.

It may be difficult to get cover where you have a pre-existing medical condition. Here it’s likely the condition will be specifically excluded by the policy. Don’t be tempted not to declare your full medical history when you apply, because this could well come back to haunt you later on. A claim made for a pre-existing medical condition will almost certainly be turned down.

On a final note, it’s important you have some cover to replace your income if you’re unable to work for a time. Statutory Sick Pay provides a weekly payment of just £79.15 per week so relying on benefits alone is probably the greatest mistake of all.

More: Spending cuts: The biggest losers | Huge housing cuts on the way | Job cuts: Where the axe will fall