Are you one of the many Britons struggling to get by on a less than adequate wage? If so, how would you cope if you found yourself out of work and still having to cover all your regular outgoings?
According to a recent survey1, almost a third of the population of Britain are living on less than the Minimum Standard Income (MIS).
Set by experts, the MIS is based on what is deemed to be a reasonable income to live on. Of course, this will depend on individual circumstances; however for a single person renting a flat (outside of London), they would need to be earning at least £17,300 per year in order to reach the MIS. Couples with children bring additional expense and would need to earn on average £18,900.
With so many people living on or below the breadline, paying for the essentials each month can be a real struggle but just imagine what it would be like if your income was reduced or in fact stopped for a period of time.
For some people, they may have money set aside for a ‘rainy day’ however if you are earning less than the MIS then finding spare money to set aside into a savings account may not always be an option.
The Money Advice Service suggests that you should have at least three months’ worth of essential outgoings2 so if you are spending around £1000 per month, you should have at least £3000 squirrelled away for the times of need. But even if you managed to save just £50 per month, it would still take you five years to reach this amount.
So what other options do you have?
Income from employment is unfortunately something that can’t be guaranteed. Illness or injury could strike at any time, and if you are off work for a long period of time, this could have drastic financial consequences. Whilst some employers may offer generous sick pay schemes, many workers will only be entitled to statutory sick pay which currently stands at just £88.45 a week. For most people, this would barely be enough to cover the rent or mortgage, let along all the other bills on top.
Although it’s still useful to save if you can afford to do so, it may be wise to set aside a smaller amount of money each month for an income protection policy. You could protect your income from as little as £14.62 per month.3
Income Protection insurance is designed to provide cover if you are unable to work – typically because of long-term illness or injury, although there are some policies available which may also cover you if you are made redundant.
If you find yourself in these circumstances, an income protection policy will pay you a regular income (an agreed percentage of your monthly income) which will enable you to cover your essential outgoings. The money is paid directly to you so you can decide what the money is spent on (always remember to pay priority debts first, such as your mortgage, in order to avoid serious consequences).
It’s also a long-term policy – whilst there are shorter-term options available, income protection insurance will pay out for as long as you need it to, whether it’s your return to work or until you reach the age of retirement. Statutory sick pay will only pay out for a maximum of 28 weeks so if you are worried about being out of work for a longer period of time, then it may be worth considering the insurance.
Compared to other personal insurance policies, income protection is often overlooked and thought of as an unnecessary expense. However for many people, it could prove to be the most essential policy that you ever take out, providing a lifeline in times of need. In these terms, it could prove to be worth every penny.
1 BBC News
3 £14.62 is based on Clerical Worker, age 30 wanting £800pm cover up to age 65, guaranteed premiums.
The above post is intended to be informative but does not constitute advice – financial, legal or otherwise. Any opinions given are the author’s own and do not necessarily reflect the views of SO Media.
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