Losing your job isn't the only cause of middle age debt
The number one cause of personal debt is losing a job. But delve a little deeper and injury and illness play a big part in financial distress in middle age. What can you do to avoid debt if you're in that age group.
We’ve long said that the foremost income shock is job loss. In 2010 48% of our clients cited this as the key factor behind their debt, and the harm that redundancy or a reduction in working hours does to a person’s wealth, as well as their self-worth, cannot be over-played.
In the 40-59 year-old age group a slightly different picture emerges, though. Job loss is still the major contributory factor, but at this age a person’s health is also key. Over half of all our clients who cite injury and illness as the main cause of their debt problem are in this age category.
The middle-aged are the most over-represented age group for personal debt; those in debt because of injury or illness even more so.
Perhaps more surprisingly, those aged 40-59 are also more likely to have (and owe more on) payday loans than any other age group, making the situation more pressing.
What can do you to avoid middle-aged debt?
Illness and injury, like job loss, can strike at any point. However the key to avoiding debt despite an income shock is to mitigate the risk. And it’s important to remember that it’s not just the loss of income from being injured or ill that can incur costs, but also the recuperative care required.
There are four standard ways to reduce the shock that injury or illness could cause to your financial situation:
- Invest your money
- Invest in your fitness
- Insure yourself
- Cut down spending
Obviously the best way to avoid debt is to have a ‘rainy day fund’ set up for if and when money is tight, and regularly check your budget. We recommend between three and six months’ worth of wages as an emergency fund in case of an income shock. We also urge people to avoid the payday loan headache.
Alongside this, reducing the contributory factors to ill-health are vitally important. It’s not just your wallet that’ll thank you for cutting down on the ciggies and the booze, or exercising more. But even with the healthiest of fitness regimes you could still get knocked over by a bus (so to speak) so it is also important to insure yourself against injury as well as illness.
Ten years ago payment protection insurance (PPI) was supposed to be the white knight in this situation, covering repayments on unsecured debt when the worst happened. But, as we all know, this didn’t always come to pass and while the idea of PPI was considered sound, the reality was very different.
Insure yourself
Injury and illness insurance cover was highlighted on lovemoney.com a while ago and the sage advice still stands. As the article states, “if you're unable to work due to an illness or an accident, paying your mortgage and household bills could get tough”. We now know, through our own stats, just how tough it can get for middle-aged people.
There are three types of insurance worth looking into; critical illness cover, income protection insurance, and income payment protection insurance. The first provides a one-off tax-free payment if you're diagnosed with an illness or condition specifically covered by the policy.
The second replaces your income if you're unable to work as a result of any illness or accident and provides a regular payment, once any deferment period has passed, until you can return to work or retire.
The third sounds similar to the second but covers for loss of income through involuntary redundancy as well, and became popular around the time of the credit crunch. However you’re usually only covered for 12 months (read more on IPI and IPPI).
Risks vs costs
Of course, you have to weigh up your individual risk against the costs of the insurance. Which insurance covers you best? Is saving for a rainy day fund better than paying for insurance? And can you reduce the premiums by adopting a healthier lifestyle?
In the end, however you individually answer those questions, you need to take steps to avoid ever getting into financial difficulty. If you’re already in difficulty then use our online service Debt Remedy, but be assured, middle age debt isn’t just about losing your job.
More on debt:
Scammers turn to 'mis-sold IVA' letters
Credit card debts mean I'll never get a mortgage
What happens to your foreign debts if you go bankrupt in the UK?
The real result of PPI mis-selling
When money saving doesn't actually save you money
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Stuff your money in the mattress? Surely not! Keep it carefully wrapped in that hole undr the floorboards, behind the bottom draw, or wherever. Those early series banknotes do appreciate in value, but only if they're kept flat, not of they're crumpled up and bounced around on...
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You have to remember that critical illness providers openly discriminate against people because they are "getting older" and this enables them to increase your premiums every 10 years; in my case doubling the premiums to retain the same level of cover or dramatically reducing the amount of cover provided if you opt not to increase the premium. They admitted this to me when I refused to continue my cover after accusing them of employing "ageist policies". Stuff your money in the mattress and keep it away from the vultures.
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Your article talks about the benefits of various insurances. As you get older, you look lovingly at your Permanent Health insurance. (PHI). Should you take ill, then you have an income until normal retirement age based on a maximum of 50% of your current income to allow for state benefits. Then you lose your job and after several months of unemployment you decide the only way forward is self-employment. If you have been able to maintain the payments on your PHI you think, once again, the if your health fails you always have that to fall back on. But self-employment is different from being a PAYG employee. Your net profit is what is left after all your expenses, car, use of house etc have been deducted. Your net profit rarely bears any resemblance to your previous employed income! Then of course you take ill and make a claim on your PHI policy. The insurance company asks for proof of income and then says it is your self –employed income on which we base your claim. Despite years of paying for a potential benefit of £20,000 per year they are offering you a benefit of £4000.00 based on your self- employed earnings. You apply to the Government for help and are told that as you are receiving too much from your PHI to qualify. The only answer is to claim on your PHI while still employed, beating redundancy if you can. Failure means an effective slip into poverty over the next few months. Once there in your 50’s, it is next to impossible to climb out of this position. It is effectively, death by a thousand cuts with the insurance company and the government taking turns slicing bits of you. Is it worth taking any of these insurances out? If you remain healthy and keep your job then no. If you lose your job and take ill then again you have lost your money. The only winners in these cases are the insurance companies!!!!!!!!!!!!!!!!!!!!
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17 August 2012