My client Dave has very little disposable income. He is employed, but having seen friends made redundant through the recession, he has been spooked about his financial instability, although he has no indication that his job is at risk. He is single with no children, but wants to protect his mortgage and the financial basics, along with unemployment cover as a priority. What should he be looking for?
Andrew Ward, Yoursure
Dave has been alerted to what could happen to him by the circumstances which surround him. With the prospect of uncertain growth for the UK and a possible ‘double dip' recession, it is understandable that Dave wants to protect against losing his job.
Environmental factors that are less obvious should be pointed out to Dave before he makes any decisions on how best to protect himself. His concerns may have been very different if the economy was the same as it is now but some of his friends had been unable to work due to accident or injury rather than unemployment (a perfectly feasible situation). These potential scenarios should be pointed out to Dave to make sure he is fully aware of all potential risks and how best to protect his mortgage.
An ideal solution would be a hybrid product combining Income Protection (IP - assuming that his sick pay is not indefinite) to cover short to long term sickness or disability and unemployment cover. If unemployment cover is his main concern a two-year benefit plan as opposed to a one-year option is likely to be his preference if budget allows.
It would be necessary to point out the difference between ASU (accident, sickness and unemployment) and the hybrid solution as on the surface they may look very similar to the client but the potential benefits can be very different.
If the price of the hybrid solution is more than Dave's disposable income allows a two year limited benefit on the IP would give a cheaper but valuable option.
Jennifer Gilchrist, Scottish Provident
As someone with very little disposable income and probably little in the way of savings as a result, Dave really needs to protect his income.
While the current economic climate and his friends recent experience may have sparked the thought that he needs to protect himself from the effects of unemployment, he also needs to think about what would happen if he became ill and wasn't able to work.
While he could consider a mortgage payment protection insurance or accident sickness and unemployment type policy to protect what are probably his biggest outgoings, these typically have a limited benefit payment period of only one or two years, which leaves him vulnerable in the event of long-term sickness. He should therefore consider taking out full income protection with a separate unemployment cover such as that available under the Scottish Provident Self Assurance plan.
While this may be slightly more expensive than a mortgage payment protection or accident sickness and unemployment type policy, this will provide a broader level of cover allowing him to protect himself if he becomes ill or loses his job through no fault of his own. Because he is not married and has no dependants, only after this cover is in place, and if his budget allows, should he consider cover such as critical illness. This would provide him with a lump sum which he could use to pay off any debts should he suffer a serious illness and be unable to work.
Aidan Dewhurst, Progress from Royal Liver
While the recession has not given us much to smile about, it has forced people to think about their finances. Dave, like many others, has started to realise that he cannot take his income for granted.
He sees unemployment cover as a priority because he's witnessed the damage redundancy can do - but it is not the only risk to his finances and may not be the biggest. Losing his job would be a blow, but there is a good chance he'd find other employment, whereas an accident or ill health might have a much longer term impact.
Being single with a mortgage, Dave relies heavily on his income, so income protection should be a serious consideration. It does not have to be expensive - Progress plans include a number of options to help reduce premiums such as different deferred periods, postponing the inflation protection or even reducing the term.
If he is looking to specifically protect his mortgage, critical illness cover (CI) is another option. Again cost need not be an obstacle because even a low sum assured would be better than no cover at all. At Progress we also offer CI with family income cover, which means that benefit payments are made on a monthly basis to the end of the term rather than as a lump sum. It is a great way of reducing premiums and helping individuals to protect against the loss of specific outgoings.
Before making any decisions, Dave would benefit from sitting down with an IFA and reviewing his finances in full. A bit of expert advice could add a lot of value.
