Millions of us are just one pay cheque away from losing our homes, so it can make sense to protect our income. But how much does it cost, whether with an income protection or mortgage payment protection insurance policy?
Homeless charity Shelter published some pretty shocking survey results recently, revealing that millions of Brits are only one pay cheque away from potentially losing their home.
More than one in three people (35%) said they could not pay their rent or mortgage for more than a month if they lost their income. Even more worrying, it’s families with children that are in the most precarious situation, with 43% unable to pay for their home for more than a month.
So what can you do to protect yourself if your savings won’t sustain you and your family for long?
Cover yourself
Protecting your income against the possibility of being unable to pay your monthly bills – including your rent and mortgage – is a really smart idea for those who can afford it. Of course, you may be forgiven for thinking that if you can’t afford to save a sufficient sum to tide you over for a few months, you are unlikely to be able to afford an insurance policy to do the same. But that’s not necessarily the case.
Remember it takes time to amass a decent savings pot, whereas a small monthly amount paid into a protection policy covers you immediately. You never know when something will happen that will leave you unable to work – maybe never, or maybe next week.
In addition, you can arrange protection at a level that is affordable to you. If you can’t afford a policy that pays out a huge portion of your usual income, you can still arrange cheaper cover that will pay out something – and that will be a major help to your family if you are unable to work.
But what is the best type of policy?
Long-term cover
Income Protection is a type of insurance that pays out if you can’t work due to an accident or illness. It used to be known as Permanent Health Insurance.
A standard Income Protection policy will pay out until retirement, death or you return to work, so it provides you with peace of mind that you will receive ongoing cover.
Typically, people cover themselves for about half to three quarters of their income, in the knowledge that this would cover their main bills if needed. The monthly payouts are tax-free and go directly to you, so you can manage your money yourself.
You also choose a deferred period, which is the length of time before you begin receiving payments. The longer you defer for, the cheaper the premiums and standard deferred periods are 13 or 26 weeks, but you can choose longer. A long period might be a good option if your company already offers generous terms if you are off sick, for example.
It’s important to note that Income Protection is an underwritten policy, so your age, occupation and health may be taken into account. The policy is designed around your specific circumstances.
Because of that there are no universal figures for premiums, but the typical examples below give an overall idea of costs.
Crunching the numbers
According to Which? for a £1,000 monthly benefit with a six-month deferred period, a 35-year-old man would pay around £13 a month. By contrast, a 50-year-old woman could pay as much as £88 a month.
I asked a couple of large insurance firms for specific monthly premiums to give a better idea of current prices, based on monthly payouts of £500, £1,000 and £1,500.
The following are from Aviva, based on a 35-year old male, wanting a deferred period of 26 weeks on a guaranteed level premium plan that would run to age 65:
- £12.40 for a £500 monthly payout
- £20.80 for a £1,000 monthly payout
- £29.20 for a £1,500 monthly payout.
A cheaper option
Many Income Protection providers also now offer short-term options, which provide similar, if not the same cover, but pay out for a shorter period, such as 24 months. This is not to be mistaken for Mortgage Payment Protection Insurance which is a different product altogether.
LV= for example offers long- and short-term Income Protection. It’s short-term, or budget option, offers all the benefits of its full cover and pays out for 24 months, but comes with a lower monthly premium as the examples below show:
£500 monthly payout:
- Full Income Protection -£13.08
- Budget Income Protection - £6.60
£1,000 monthly payout:
- Full Income Protection - £21.65
- Budget Income Protection - £9.73
£1,500 monthly payout:
- Full Income Protection - £30.14
- Budget Income Protection - £12.85.
Based on a non-smoker, aged 35, with a six-month deferred period, on a guaranteed level cover basis until age 65
As you can see Income Protection doesn’t have to be expensive and you can tailor it to your needs. But since it is specifically designed to cover sickness and accidents, what happens if you are made redundant?
Cover for redundancy?
[SPOTLIGHT]Unemployment cover is not included as standard in Income Protection policies. However, life insurers often offer an unemployment add-on to their short-term Income Protection cover.
Mortgage Payment Protection Insurance is another option, and is suitable for many borrowers, who simply want short-term cover to ensure they can pay their mortgage.
It usually costs around £5 per £100 of cover, so it would cost roughly £25 a month to cover £500, £50 to cover £1,000 and £75 to cover £1,500.
However premiums now vary widely and you can tailor deals to your circumstances so that they end up significantly cheaper than this - even half the price.
Mortgage Payment Protection Insurance is different to Income Protection in that it is designed to cover your mortgage repayments, not replace your income, and it pays out for either 12 or 24 months, not until death or retirement.
Each insurance company offers something a little different, which is why it is so important to check with an independent financial adviser to find out the exact combination of elements that suit you.
Protection insurance can work out relatively cheap for something that provides invaluable financial support to cover your bills if you can’t work. It is certainly worth considering.