If you couldn't work because of an illness or disability, how would you cope financially? Rely on state handouts and hope for the best?
It has always been dangerous to rely on the government, but now it's even more risky with new welfare reforms providing less support.
The new rules see Incapacity Benefit and Income Support (as a result of incapacity) replaced with Employment and Support Allowance (ESA). As long as you're under State pension age, you may be entitled to ESA if you have an illness or disability which affects your ability to work. But you'll only qualify once your Statutory Sick Pay has ended, or if you're unable to claim it in the first place.
How much protection does the government provide?
The simple answer is: very little.
Of course, the government is keen to get you back into work as quickly as possible. So there's not much incentive to stay on benefits when you realise how derisory they really are.
For the first 13 weeks following a claim, an assessment will determine whether you're incapable of working. During the assessment phase, ESA will be paid at the following weekly rates:
Age of claimant | Weekly amount |
|---|---|
A single person under 25 | Up to £47.95 |
A single person over 25 | Up to £60.50 |
Once a claim is successful, ESA will be paid at an enhanced weekly rate of:
Type of claimant | Weekly amount |
|---|---|
A single person in the Work-Related Activity Group* | Up to £84.50 |
A single person in the Support Group* | Up to £89.50 |
*If you're able to undertake some form of work, you'll enter the Work-Related Activity group. This will cover the majority of claimants. Those unable to work in any capacity will enter the Support Group and qualify for higher rates.
(This is a brief summary of ESA, for more information visit www.direct.gov.uk).
Why do you need to protect your income?
As you can see, these benefits are nowhere near generous enough to lead to a comfortable lifestyle. In fact research shows in the event of long-term illness or incapacity, only 15% of people would get by without any financial difficulty**.
This is why you need to take out some protection of your own, so you'll be able to support yourself financially if you're no longer able to work.
Of course, protection may not always be necessary. Your employer may provide sufficient sick pay, or your partner/family may be able to support you financially. But for many of us it's a fact that extra protection will be required over and above state provision.
How can you protect your income?
I would suggest you think about buying an insurance policy such as Critical Illness Cover (CIC) or Income Protection Insurance (IPI). Both of these policies pay out benefits in the event of illness or accident.
Critical illness cover
CIC provides a lump sum pay out if you're diagnosed with one of the conditions specifically covered by the policy. Typically, you'll be covered for these core conditions:
- Certain types of cancer
- Coronary artery by-pass surgery
- Heart attack
- Kidney failure
- Major organ transplant
- Multiple sclerosis
- Stroke
Most plans also protect against a range of additional conditions too. You'll need to check the terms and conditions to find out exactly what cover is included.
Under a CIC policy you don't necessarily need to lose your income to make a successful claim. In other words, if you're well enough, you could continue working and still receive a payout.
Income protection insurance
Insurance under IPI replaces part of your income until you're ready to return to work. The maximum benefit is usually between 50% and 65% of your salary. This type of policy will protect you from any illness or accident which stops you from working. If you're never well enough to start working again, IPI will pay out until you reach normal retirement age.
You'll be able to choose a waiting or 'deferment period' which determines when benefits will start. Day one cover starts immediately but is the most expensive. Typically, most policyholders defer their pay out for 13 weeks. If you want to cut your premiums further, cover can be deferred for 52 weeks or more, but you may need another source of income in the meantime.
Most IPI policies will cover you if you're unable to do your own job. But you could bring down the cost by taking out a policy which will pay out if you can't do any job. This means you won't get a penny unless you're incapable of working in any capacity. This type of policy, while cheaper, provides much more limited cover and probably won't give you all the protection you need.
Alternatively, you could choose an IPI policy which covers you if you're unable to do any job which is suitable for you given your education, training and experience. This offers reasonably comprehensive cover at mid-priced premiums.
On a final note, watch out for any policy exclusions which could put a claim at risk. This applies to all CIC and IPI plans. And don't forget, neither policy protects loss of income in the event of redundancy.
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**Research from YouGov.
The comments above are the opinions of the author only and do not represent advice specific to your circumstances
This article has been approved and issued by Direct Life & Pension Ltd who are authorised and regulated by the Financial Services Authority.
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`Date of publication 19/11/2008
Articles are checked for accuracy at the time of publication but information will go out of date over time. The levels and bases of, and reliefs from, taxation are subject to change as UK legislation and regulations and the UK tax regime are amended from time to time.'