Could You Live On State Benefits?

If you were off sick for months, how would you keep the wolf from the door? This report suggests that relying on state benefits is unwise.

According to new research from Nationwide Building Society, most homeowners would not be able to cope financially if illness or injury caused them to be out of work for many months.

Indeed, Nationwide found that more than three in five homeowners (61%) said they would not be able to survive financially if out of work for six months due to accident or sickness. Workers aged 34 and under were most worried, with three-quarters (75%) admitting that they would struggle to pay all their bills. For those over 55, this proportion dropped to three-sevenths (43%).

A shaky safety-net

On average, homeowners believe they need just short of £300 a week to survive without their usual income. However, the big problem is that state sickness benefits are much lower than this. Employment and Support Allowance (ESA, which replaced Incapacity Benefit and Income Support on 27 October 2008) pays up to £89.50 a week. Given that 98% of those questioned needed more than £100 a week to survive, it's clear that ESA is a desperately weak safety-net.

It's also very telling that workers have no clue as to just how much they would be entitled to while off sick. Almost nine in ten workers (88%) had no idea of how much ESA they would receive in lieu of income. Nevertheless, in 2007, over 2.4 million people aged between 18 and 64 claimed Incapacity Benefit. Of these, four-fifths (80%) were claiming for more than six months, and two-fifths (40%) were claiming for more than five years.

On what can you rely?

So, while long-term sickness may never happen to you, it does affect millions of people. With state benefits alone insufficient to maintain a decent standard of living, Nationwide found that we hope to fall back on a combination of the following:

1. Savings and investments. Almost half (49%) of those questioned would use this cash cushion. Alas, Nationwide also found that one in four of us (24%) saves nothing and less than half (47%) save regularly.

2. State benefits. Nearly a third of us (32%) would rely on the State, but would still struggle to pay monthly mortgage repayments and other household bills.

3. Friends or family. More than fifth (21%) would tap our relatives and friends for cash, but they may also be strapped for money.

4. Insurance policies. Two in nine workers (18%) would claim a tax-free monthly income or lump sum from protection insurance policies.

5. Selling their home. One in six (17%) would consider selling their home to make ends meet. However, falling house prices and the reappearance of negative equity make this a tough call.

Sadly, it's quite clear that -- should the unexpected happen -- few of us have enough cover in place to see us through an extended period of illness. Although we may believe that we could muddle through, it is not enough to rely on the State, family or friends. In reality, the only person able to build a sufficiently strong safety-net is you.

As with all money-management challenges, the best thing you can do is to plan ahead for rainy days. For example, to build your own safety-net, you could look into the following private insurance policies:

• Income Protection. This pays out a tax-free monthly income if you are unable to work due to illness or injury. For more information on this insurance, read Look After Your Greatest Asset
• Critical Illness Cover. This pays out a tax-free lump sum on diagnosis or treatment of a number of serious medical conditions, such as heart attack, cancer, stroke, etc. For more information on this insurance, read our guide to critical illness.
• Payment protection insurance (PPI). This meets the monthly repayments on a mortgage, personal loan, credit card or other debt if you are unable to work due to accident, sickness or unemployment. However, lenders charge extortionate premiums for PPI, so do shop around.

Finally, another option would be to rely on credit to make ends meet during tough times. However, this can be an extremely expensive option, given that a typical credit card charges a yearly rate of almost 18% APR on purchases. Likewise, unapproved overdrafts incur rip-off fees and sky-high interest rates. Remember that the road to financial Hell is paved with plastic cards, so don't become overly reliant on yours...

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