Protect your income against job loss fears
As unemployment rises, now is the time to ensure you have a financial cushion
Sunday 16 October 2011
More than two and half million Britons are out of work and that's just the official figure. People will be thinking how can they insure themselves against the P45 landing on their desk or a period of illness or accident.
Options are somewhat limited, with a choice between income protection and payment protection insurance (PPI). The latter is normally sold alongside a loan or credit card, and will help you to keep up with repayments if you're unable to work.
However, the scandal of the financial services industry mis-selling PPI is still fresh in our minds, with banks ploughing through a massive backlog of compensation claims.
As a result, it is tempting to disregard all PPI policies, but it is possible to buy a stand-alone PPI that is separate from your bank. Independent financial adviser Ruth Whitehead said: "There is a case to be made for stand-alone unemployment insurance. Just because PPI has been mis-sold it doesn't obscure the fact that you should protect yourself."
With the rise in unemployment many people may be finding that their mis-sold PPI is coming in handy. "While some people were mis-sold insurance, many people now have redundancy cover that they would not have otherwise had," said Ben Heffer, a life and protection analyst at financial information firm Defaqto.
In theory there is nothing wrong with PPI, said Matt Morris, a senior policy adviser at Life Search. "PPI has a bad reputation, but the problem is not with the product, but the way that it's been sold," he said. "PPI is very easy to sell because it doesn't involve underwriting."
Mr Morris added: "Income protection should be the first choice. The only benefit of getting PPI is that the consumer either can't get income protection, or is on a tight budget."
A PPI policy will pay out only for a maximum of two years, compared with an income protection policy which will pay out until you retire. On the other hand, a PPI will automatically cover you if you're made redundant, whereas an income protection policy would not.
It is possible to take out an unemployment add-on to your income protection policy: "The unemployment element is exactly the same with income protection as PPI," said Mr Morris. If you do go for this option, though, you should be aware of the extra costs.
David Wood, an independent financial adviser at Invest and Protect, said: "There are a couple of insurers that do have bolt-ons for redundancy, but these will make the premiums rocket. The benefits are unlikely to last indefinitely, because if somebody is made redundant but given a salary, they've no incentive to go back to work."
Ms Whitehead advises consumers to focus on staying in work. "Unemployment cover is expensive," she said. "You'd be better off spending the money on making sure you're well qualified in the area you want to work and undertaking other courses of study so that you're more adaptable."
If neither income protection nor payment protection appeals to you, another viable option is accident, sickness and unemployment (ASU) insurance. As with PPI, this will cover you for a short, fixed period of time. However, unlike PPI it isn't linked to a repaying a specific debt. "ASU is a short-term policy that would be another alternative," said Mr Morris, "although it's still in theory inferior to income protection."
While income protection will pay between 50 to 60 per cent of your income if you're unable to work due to sickness or disability, it won't cover you if you're made redundant. If you want to protect yourself against this, a PPI or an ASU will allow you to claim for the length of the term of the policy – usually from 12 to 24 months.
With PPI, one of the main downfalls is that the insurance is linked to your loan. "PPI is a short-term stop-gap solution very much designed to protect the lender and not necessarily the consumer," said Mr Wood.
It is, of course, possible to get add-ons to your PPI policy, although as the level of protection goes up, so will the price. "Some will go up significantly. If you have to ask for more, then you also have to pay for more," said Mr Wood. In an attempt to get around this you can opt for mortgage payment protection insurance (MPPI). This has the advantage of giving you an additional percentage of the mortgage payments when you claim.
Ms Whitehead says people should not be driven by price. "The cheapest option is not always the best value, and unfortunately price comparison websites don't give the whole story."
From April 2012 lenders won't be able to sell you PPI at the same time as your loan. There will be a gap of seven days to allow you to do some proper research and find out if the best PPI policy for you is a stand-alone one.
"The root cause of the PPI problem is that lenders selling loans had a monopoly on the consumer," said Mr Heffer. "It's important that consumers really do take the opportunity to look at the competition and not just choose the cheapest policy."
There are going to be risks involved. "One of the major pitfalls with PPI is that a lot of the policies sold by banks will exclude any claims for mental health problems (including stress) or muscular skeletal problems (including back problems)," said Mr Morris. "These are probably the two biggest reasons to claim, and if they're excluded then it's not worth a heck of a lot."
With income protection the biggest reason for those unable to claim is non-disclosure. "The client needs to disclose everything, because you don't want to give the insurer any where to hide," said Mr Wood. "As with any insurer, they're always looking for a reason not to pay out."
PPI does carry with it the risk of premiums being changed. "Most short-term income protection policies incorporate cancellation clauses. They can give notice and then change the premiums or even cancel the plan," said Mr Heffer.
"PPI does genuinely have a value," said Mr Wood. "The problem is that it's open to abuse because it makes money. Trustworthy banks have abused them and ruined it for the rest of us. If you do decided to go for PPI, then stick with a well-known company."
Mr Morris disagrees. "There is absolutely no reason for choosing PPI over income protection. The most important product for people to have is income protection."
Matt Morris, Life Search
"Income protection should be the first choice for people who want to financially protect themselves, even above life insurance. It can pay out until you retire and it's tax free. Unfortunately, it's not a product that many consumers know about, but it's better than PPI and has a better pay-out rate for claims."
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