Pandemic pushes income protection and financial planning up the agenda

Economic crashes rarely happen overnight. They usually come with fair warning and while this may not soften the blow, it provides breathing space to plan for collateral damage. Covid-19 showed no such decency. It closed down great swathes of the economy abruptly and left many fearing for their livelihoods.

It was an unpleasant wake-up call for those who have never thought about protecting their income and research just produced by Aviva shows that the pandemic experience has prompted more people to start considering how they would manage financially if they became ill and unable to work.

According to the research, two out of three workers do not have an independent source of income to call on if they were affected by injury or a long or serious illness. Most say they are reliant on sick pay from their employer or would have to use their savings.

Only 35 per cent of those surveyed had income protection while 26 per cent had specified illness cover.

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"It is concerning that 64 per cent of people in work have no provision to cover their monthly expenditure if they could not work for an extended period, but also encouraging that 70 per cent of respondents said the pandemic has changed how they now think about managing financially if they became ill," says Siocha Costello, protection senior marketing manager at Aviva Life & Pensions.

Claim

“Our claims statistics show that the average length of time people claim for is five years. That’s a long time to be without an income if no provisions have been made in advance.

“Last year, we paid out €45 million to 2,000 customers claiming on their income protection policies. The average age of claimants was 48 and the youngest was in their early 20s. Around 20 per cent of those with no provision said they would depend on the State to give them money but it is difficult to see how they could pay all of their monthly bills if they are living on disability benefit of €203 a week. This contrasts with our average weekly pay out of €700 to customers with income protection claims.”

Financial planning consultant Stephen McCarthy, of Alchemi Financial Services, is not surprised by the research findings. "Most people don't think proactively about financial management or planning at all," he says. "Usually it's a life change that triggers people to seek advice.

“It might be redundancy, a job change or a divorce while having children also tends to focus the mind on risks such as health, death, illness and the inability to work. These risks can be relatively straightforward and inexpensive to address.”

Ms Costello says the starting point is to nail down what entitlements are provided by one’s employer. In a nutshell, how much and for how long?

“If your employer is going to pay you for the first six months of your sick leave, you don’t need to have income protection for that period and the longer the deferred period, the cheaper it is. The cost will also depend on how much of the income is to be protected,” she says.

To illustrate the cost of cover, Ms Costello gives the example of a 30-year-old (non-smoker) earning €30,000 who wants to protect 75 per cent of their salary. The monthly gross cost is €35.74. With tax relief at the marginal rate, this comes down to €28.59 assuming a deferred period of 26 weeks and provides a weekly benefit of €432.

For a worker aged 41 (non-smoker) on €60,000, the monthly gross cost – also based on a deferred period of 26 weeks and protecting 75 per cent of the salary – is €115.86. With tax relief this works out at €92.69 and gives a weekly benefit of €865.

In an ideal world, Mr McCarthy says, people should start making active financial provision in their 30s when premiums are relatively modest. It might be prudent to start earlier but Mr McCarthy is a realist who says that most of those in their 20s are far too busy enjoying life to think too far ahead. However, he is keen that those in this age bracket who are already working should consider taking out both health insurance and income protection.

Long-term plan

“Most of the people I see are in their 40s and 50s with some savings and some pension and possibly a property, but they usually have no idea what it all adds up to and what their financial picture looks like into the future,” he says.

“In your 40s and 50s, however, it is less about financial products and more about cash flow planning so at this point you should use a financial planner offering a fee-based service as opposed to one being remunerated by commissions on product sales.

“Cash flow planning is about understanding what happens to your long-term financial plan if various things happen and testing the cash flow for different levels of expenditure and income.”

McCarthy adds that one of the key benefits of engaging in a lifestyle financial planning exercise is that it provides clarity and peace of mind whatever age you are.

“So many people worry that they will run out of money because they have neglected their pension for example,” he says. “However, very often our clients are surprised at how good things are and are sorry they didn’t engage with us years before because of the relief it brings.”