5 days to financial disaster

How would you cope financially if you were unable to work?

This is a truly alarming statistic: There are 15 million Brits who have a financial safety net of less than £249. If they were unable to work, and average monthly take home pay is estimated at £1,561, these savings would last just five days.

New research from HSBC reveals that, on average, 30% of adults have less than £249 in savings. Worse still, 19% of those surveyed have no savings at all. Not surprisingly, younger people are the least prepared for a financial emergency. Of those aged 25 to 34, 41% have less than £249 to fall back on, while a quarter have no cash cushion whatsoever.

Meanwhile, women are in a worse financial position than men. 13% said they had less than £249 to fall back and 20% have no savings at all. This compares with 17% of men whose savings would run out in five days or less, and 9% who admit to giving saving a miss completely.

But despite all these worrying figures, just one in five people claim they wouldn’t be able to pay their mortgage or rent and household bills if they were no longer able to work.

The numbers don’t add up

HSBC’s research is a real concern. Ideally everyone should accumulate at least the equivalent of three month’s pay so they would be able to cope in a financial emergency such as losing their job. But if you’re unable to work as the result of ill health or an accident, it could potentially be a much longer-term problem.

Failing to protect your income is taking a big risk. You may be surprised to hear that Statutory Sick Pay is a measly £79.15 a week. If you received this benefit for a year you would get little more than £4,000.

Remember, if you’re self-employed you won’t be entitled to claim Statutory Sick Pay, so the need to protect your income is even greater with no help from the state.

How can you protect yourself?

It’s your responsibility to make sure you can cope financially if you lost your income. If you can’t rely on your partner or family to support you and there is little or no cover provided by your employer, then think about insuring your income now.

There are two main insurance policies you can use to protect yourself: Critical Illness Cover (CIC) and Income Protection Insurance (IPI).  Both of these policies pay out benefits in the event of illness or accident.

CIC provides a lump sum payment if you’re diagnosed with one of the specified conditions covered by the policy. Typically, you’ll be covered for the following core conditions:

• Certain types of cancer
• Coronary artery by-pass surgery
• Heart attack
• Kidney failure
• Major organ transplant
• Multiple sclerosis
• Stroke

Most plans also protect against a range of additional conditions so make sure you check the terms and conditions to find out exactly what’s included. If you’re well enough, you may even be able to continue working but still make a claim.

Meanwhile, income protection insurance or IPI is designed to replace a proportion of your income until you’re ready to return to work. The maximum benefit is usually 50% to 65% of your salary. This type of policy will protect you from any illness or accident that prevents you from working. However, some policies will cover you if you can’t do your own job while others might only pay out if you can’t do any job.

Of course, the latter is the cheaper option but cover is less comprehensive as your claim will only be successful if you can’t work at all in any capacity.

With both types of policy, watch out for any exclusions which could affect a claim. And remember, neither type of insurance covers unemployment or redundancy.

Recent question on this topic

• sandyfloyd asks:

  I pay £38:75p per month for Private Medical Care.Can I claim tax relief on these contributions if so for how many years can I claim retrospectivly

  • 
    LoveKat answered "I don't think there is any tax relief given on the premiums paid for Private Medical Insurance. It..."
  • Read more answers

How much will it cost?

Using the lovemoney.com life insurance service, the most competitive policy I can find provides CIC combined with life insurance for £36.54 a month for a 35 year old man (who doesn’t smoke).  This premium provides £100,000 worth of cover over 25 years, and will pay out the sum assured on death or diagnosis of an illness or condition covered by the policy.

Meanwhile, for women the same policy would cost £34.86 a month based on the cheapest premium available right now.

For income protection insurance, the cheapest guaranteed premiums come in at £18.07 a month for a 35 year-old, non-smoking man and £29.71 a month for women. This policy will provide a monthly benefit of £1,250 tax-free to replace a proportion of lost income. Cover remains in place until the policyholder reaches their 60th birthday. But bear in mind, if a claim is made the payout will only start after a period of 13 weeks incapacity. You can arrange for the policy to start sooner, but this will cause the premium to rise.

Remember these quotes are just ball park figures, but they should give you a rough idea of how much it could cost to protect yourself if you can't work. It seems to me like a relatively small price to pay.

More: Revealed: The truth about health insurance policies | 5 people who need life cover