How to insure yourself and your income

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Over the last few years, the television news has been filled with reports of spectacular bank computer ‘glitsches’, with thousands of people going to their ATM only to discover that they could not access their cash.

Well, imagine that same sinking feeling week after week, and month after month, and you come close to understanding the reality of being made redundant, or of living in what statisticians call ‘relative poverty’.

At the end of June, the Department for Social Development published its latest poverty figures for Northern Ireland, stating that 20% of working-age adults were living in relative poverty last year, and that was up from 18% the year before. That means 213,000 people across the province, and it’s getting worse rather than better.

Stormont uses the EU definition of ‘relative poverty’, meaning those living on less than 60% of the NI average household income, which is currently is £404 a week. That means everyone whose income is less than £264 a week.

Does this bring into focus the effect that redundancy could have on you and your family? Would the sudden absence of your salary put you beneath the £264 threshold?

It’s unfortunate, then, that only 8% of UK families have insured their income, and less than a quarter of families feel protected against redundancy and unexpected events (Source: Aviva’s ‘Family Finances Report’).

However, the good news is that there are various ways of insuring yourself against unexpected events that result in loss of income.

One such solution may be ‘Accident, Sickness and Unemployment Insurance’ or ASU.

ASU is not the only way to protect your income, but it is remarkable from the point of view that it is one of only 2 types of insurance that cover you for simple redundancy.

It’s a product which needs to be in place for some time, however, before your cover ‘kicks in’.

ASU policies normally have a built-in condition saying they won’t pay out, if you claim within 3-6 months of taking the policy. This is to discourage ‘departure lounge’ applications from people rushing to insure their wage, where they already know their jobs are on the line.

ASU is not a long-term insurance, it is designed to give you a breathing space – typically of 1-2 years – to find a new job, or have a period of convalescence, before returning to work.

A similar product is mortgage payment protection insurance, or MPPI, which specifically covers your mortgage payments in the same situations - when you stop work though redundancy, sickness, or accident.

There are other insurance types that cover your salary, not for redundancy, but for having to give up work for health reasons.

If you are one of the 4.25 million self-employed people in the UK, these may be of interest to you.

Income Protection Insurance, or IPI, provides an alternative income, typically equivalent to around half of normal income, tax-free, and pays out alongside any other benefits you may receive.

Then there is critical illness insurance or CI, which pays out a lump sum if you are hit by one of a list of serious health setbacks such as stroke, cancer, heart attack, or the need for major surgery. You can set up your CI to cover your income and healthcare costs for a chosen period, or to pay off your mortgage.

These ways of covering your ability to earn make good sense, given that around a quarter of people will have a serious health issue, before they retire.

This article does not constitute financial advice. Brian Kennedy is a chartered independent financial adviser within Priory Financial Planning Ltd., and can be contacted on 028 9042 5025 or Priory Financial Planning Ltd is an Appointed Representative of TenetConnect Ltd which is authorised and regulated by the Financial Conduct Authority (FCA)