Life insurance and income protection: the spending that you SHOULDN'T cut

Getting your spending under control is a good idea during the pandemic, but there are certain outgoings that should be left alone.

It’s no secret that the Coronavirus pandemic is leading to financial worries for many of us.

As a result, plenty of people up and down the country are looking carefully at precisely where their money is going each month and where they can cut back.

It’s a very sensible thing to do, but there are certain regular spends that might be best left alone.

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Protection policies

A very tempting option for many people will be any protection policies they have in place.

This may be life insurance, critical illness cover or some form of income protection, and can easily cost more than £100 a month between a couple.

Protection policies are often regarded as something of a tough sell by financial advisers.

People, understandably, don’t like to think about the possibility of dying, falling seriously ill or being unable to work when they are doing something more exciting like buying a house.

And so even if they do sign up for a policy, they may resent it somewhat and see the current crisis as a good opportunity to cut their losses and run.

But the reality is that for many of us some form of protection is absolutely vital.

I know that if I was hit by a bus tomorrow ‒ unlikely as that may be given I don’t leave the house now ‒ I want to know that my wife and children will be ok financially.

And without the life insurance policy I have in place, realistically they would have to sell our home, which is complicated enough without the current situation.

Similarly, the chances of me developing a significant illness or losing my income have not lessened as the result of the pandemic. Indeed, in the case of the latter, it’s actually become more likely, making some form of income protection cover even more essential.

This isn’t spending that should be ditched without long and careful consideration. You may be better off shopping around for a new policy that works out cheaper, so long as it still offers sufficient protection.

After all, if your circumstances have changed ‒ you’ve lost some weight for example ‒ then your life insurance may actually be cheaper.

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Mortgage payment holidays

The monthly mortgage repayment is the biggest regular outgoing for most of us, so any way to cut it ‒ or remove it entirely ‒ from our finances is always going to be attractive.

After discussions with the Treasury, the nation’s lenders have agreed to offer borrowers affected by the Coronavirus pandemic a three-month mortgage holiday.

And according to data from UK Finance ‒ the trade body that represents the vast majority of lenders ‒ borrowers are flocking to take advantage, with 1.2 million borrowers requesting a holiday between the introduction of the measures on 17th March and the 8th April.

This is certainly understandable. I’d love to have the best part of £900 a month to spend on something other than my home loan, thanks very much. But that doesn’t mean it’s a good idea.

It’s important to remember that this is just a holiday.

The payments aren’t being cancelled ‒ you’ll still have to pay them, just later on. And your future payments will be higher as a result, to make up for this break in repayments, as well as the interest still being charged on the balance you owe.

There have been mortgage brokers who have raised concerns about these holidays being taken up by the wrong borrowers.

Mark Harris, chief executive at SPF Private Clients, for example, said: “In the same way that people are stockpiling food they don’t need, there are selfish borrowers who are asking for payment holidays when they don’t need them. This is blocking the phone lines for those who do.”

While I’m wary about labelling them selfish, Harris is right in that these holidays really should only be taken up if your finances are in such a precarious position that you might otherwise struggle to make your normal repayments.

If you’re currently managing OK, there’s little point in making the overall cost of your mortgage higher for little discernible benefit.

Instead, you might want to take this opportunity to review just how competitive your current mortgage deal is and whether you could save a few quid by remortgaging.

Priority bills

While you may have plenty of bills coming in each month, it’s worth remembering that not all of them should be viewed as priority bills.

These are the ones which come with much greater consequences should you fail to pay them than others. Of course, the mortgage is a good example here.

If you fail to pay it then you run the risk of repossession (though thankfully lenders have agreed to be far more lenient on this given the ongoing situation).

Another priority bill is your Council Tax. With spectacular timing, the Council Tax bills most of us pay have just gone up with the start of the new tax year by an average of £68 for a Band D property.

But skipping your payments come with significant consequences ‒ you could end up being prosecuted.

Your gas and electricity should also be viewed as a priority debt, since if you fail to keep up with your payments you could have your power turned off.

There’s an excellent breakdown of what is classed as a priority debt ‒ and why ‒ in England, Wales, Scotland and Northern Ireland on the StepChange Debt Charity website.

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