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Income protection: Shielding yourself from the financial impact of poor health
On 6 May 2023, more than three years after the outbreak of the pandemic, World Health Organization Director-General Tedros Ghebreyesus announced that Covid-19 would no longer be recognised as a public health emergency of international concern.
While an important milestone, this official ‘declassification’ falls in line with a broader narrative of de-escalation around the virus. In the UK, for example, the ‘living with Covid’ strategy had already put a pause on some official data gathering activities and the cancellation of the NHS Covid app had put an end to the risk of ‘getting pinged’.
Despite receding from prominence, however, there is clear evidence of Covid-19’s ongoing threat to our health. This is not only from the continued direct risk of infection, but also in terms of the associated difficulties many are facing in the wake of the pandemic, including long-Covid and poor mental health. Indeed, research by Mind has found that around a third of adults and young people report that their mental health is much worse since March 2020.
For some, this decline, whether triggered by the pandemic or other forces, can have damaging knock-on effects. Indeed, the Chartered Institute of Professional Development (CIPD) has identified mental ill health as the leading factor behind long-term employee absence, with 57% of employers citing it among their top three causes. This was above musculoskeletal injuries, such as neck strain and back pain, which was included by 46%, and stress, which was included by 38%.
Personal and economic cost of ill health
These concerning figures carry a cost to employers in terms of lost productivity – estimated to be up to £56 billion per year in the UK because of mental health alone – but there is also a clear personal and economic cost for the increasing numbers of people who become economically inactive as a result of prolonged illness or injury. In these situations, long-term absence can mean losing the regular monthly salary which an individual and their wider family might depend upon to support the payment of fixed regular bills and the general cost of living.
Employers can play an important supporting role in such cases, but sick pay can only do so much to fill the potential gap in earnings. In the UK, those eligible for Statutory Sick Pay can get £109.40 per week for up to 28 weeks if they are too ill to work. After this point, you may be able to claim Employment and Support Allowance (ESA) or Universal Credit. Some employees might also be lucky enough to benefit from additional support from their employers in the form of an occupational sick pay scheme, often referred to as contractual sick pay, but this will depend on the details of an individual’s employment contract.
Leaving aside the health-related challenge of coping with an illness or injury, it is not difficult to see how these circumstances can quickly lead to escalating financial problems. Indeed, research among those diagnosed with a long-term illness since the pandemic found that two in five people lost 10% or more of their earnings, while others had been forced to leave employment and forgo their earned income entirely.
Financial support through income protection
Insurance can provide a valuable safety net at these times. Some employees might be offered this as part of their benefits package in the form of a Group Income Protection scheme, which provides a replacement income stream during long-term absence.
Those who are not part of a group risk scheme, including the self-employed, can look to individual income protection policies to provide a similar level of financial reassurance. This type of cover can provide regular income to those incapacitated by long-term illness or injury, potentially avoiding savings being depleted and more serious financial damage being caused.
Policies can be tailored according to a number of person-specific variables, including age, occupation, status as a smoker or non-smoker, and general state of health. They will also stipulate a pre-agreed waiting period before payments start, which is usually a minimum of four weeks but can be up to a year.
Navigating a return to health
Upon the authorisation of a valid claim, a policyholder will receive monthly payments of tax-free income. The amount received is a predetermined proportion of your regular monthly salary – typically between 50% and 65% – and payments continue until an individual is either well enough to return to work or the policy reaches the end of the agreed term or the policyholder retires. Further to providing financial support through payments, some insurers will also provide intervention support services to help policyholders on the pathway back to work.
Data from one insurer points to a fall in the average age of income protection claimants, underlined by a 19% rise in the proportion of customers under the age of 40 when they first claimed.
For these individuals with cover in place, the fear of financial distress can be eased, meaning there is one less thing to complicate their return to better physical or mental health.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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