The 2013 Deadline to Breadline Report from Legal & General, looks at the impact of the main breadwinner dying suddenly or becoming ill.
It’s clear many households are worse off this year than they were in 2013. Despite this some of the findings are both surprising and extremely worrying
- In the event of the main breadwinner dying or becoming ill, the average UK household would have spent all their savings in just 18 days and then be reliant on state benefits
- Most households estimate their savings would last three times as long as the reality
- The average UK household has just £660 in savings down sharply from £1,094 in 2012
- 37% of all households have no savings whatsoever
- Disposable incomes have fallen by an average of 3.9% over the past year, equivalent to £21 per month
- The amount households are able to save has dropped by 10% over the past 12 months
It’s clear the majority of UK households only have enough savings to cope with a relatively small financial emergency, after all, £660 probably only covers a set of new tyres for a car or a new television.
So, how do people cope with a financial catastrophe, such as the death or illness of the main breadwinner?
Building up more savings clearly isn’t an option for many.
To start with the amount needed to cope with the death or illness of the main breadwinner is huge. Furthermore, household disposable incomes are falling and according to Legal & General the amount people can afford to save has dropped by 10%.
How long would your savings last?
Try dividing your savings by your monthly net income, how many months would they last? Or do you measure it in days?
So what’s the answer? For most people it’s simple, insurance.
Sure, insurance costs money, but the cost can be surprisingly affordable and for most people it’s the only practical way of providing for a family if the main earner dies or becomes ill.
What are the options?
Insurance is never the most interesting of subjects and most people don’t like to think about dying or becoming ill. But if you ever need to claim you will be hugely glad you took the time to protect your loved ones.
However, the range of options can be mind boggling, so let us try and simplify things for you.
Protect your mortgage Most people have a mortgage and even with interest rates at all-time lows the payments probably represent your largest out-going each month. Ideally you should take out cover to ensure your mortgage is repaid if full on death or serious illness, often known as critical illness.
Remember, mortgage protection shouldn’t just be taken out in the name of the main breadwinner, it’s important to cover both mortgage holders. After all, if a stay at home parent isn’t covered, and becomes ill or dies, how is the main breadwinner able to go out to work?
Taking our Life Cover to protect your whole mortgage on death is relatively inexpensive, especially compared when to the mortgage payments, but adding in Critical Illness Cover can push up the cost. If taking out Critical Illness Cover for the whole mortgage is too expensive, consider a smaller amount, so that say half of the debt is repaid if you or your partner becomes seriously ill.
Protecting your family Having the mortgage paid if you or your partner dies, is a great start to securing the financial future of you and your family should the worse happen. But additional income will be needed to help pay the bills.
There are two options here, both involve taking out Life Cover.
The first option is to provide a lump sum on death using a Level Term Assurance (LTA) policy. Any lump sum pay-out could then be invested to provide an income whilst the family is still dependent. After which time, the capital could be used to help with other expenditure, such as university or buying a first home.
The second option is to provide an income on death using a Family Income Benefit (FIB) policy. This option provides an income to the end of the policy term but no lump sum. For example, if death were to occur three years in to a 15 year policy, the sum assured or income would be payable for a further 12 years.
Although a LTA costs around a third more than a FIB contract, it is the preferable option, as it provides a lump sum. However, if cost is an issue, then FIB can be an excellent cost-effective alternative.
Again it’s important to make sure both parents are covered on death.
Protect your income If you are employed hopefully your employer will provide some short term sick pay. Although in these tough economic times this is one area many businesses are looking to cut back on.
Even the most generous employer will probably only pay you for a maximum of six or 12 months if you are unable to work. If you are self-employed you will have no such cover.
If you take out PHI then you will have some decisions to make:
- How much you want to be covered for? The maximum is around 50% of your pre illness earnings, but remember, any income paid to you is tax-free
- The deferred period, which is the time you need to wait before you start to receive income. Deferred periods are generally one, two, three, six or 12 months and should be selected to dovetail with any benefits provided by your employer or your savings
- The cessation age, which is the age at which the income will stop being paid to you if you are unable to work for a prolonged period. This should be selected to dovetail with your planned retirement age
Boring but crucial and not expensive!
Taking out insurance will never be the most exciting piece of financial planning you undertake, but is crucial.
Imagine for a second how your family would survive if they couldn’t pay the mortgage, or your income stopped. How long before they are on the breadline?
For the cost of a round of drinks, or meal out, you could probably address this problem and leave your family secure if the very worst happens.