Don’t Wait Until the Storm Breaks to Protect Your Finances

Life before the coronavirus now seems like a very distant memory, such has been the effect of the pandemic. So, it’s easy to overlook how suddenly it seemed to unfold, moving rapidly from the periphery of our lives to changing everything within a matter of weeks.

Little wonder, then, that so many felt unprepared for it, not just emotionally and mentally, but also financially. In many cases, the financial impact was exacerbated by the fragility of the financial defences people had in place.

Close to home
Large numbers of people have seen their jobs disappear – temporarily or permanently – and their incomes hit hard. Many more have seen friends and family adversely affected by changes to their employment and incomes. Some will have felt financially resilient prior to the crisis, only to discover that once an income falls or disappears, things can soon start to become difficult.

While we typically recommend having at least three months’ worth of rainy-day cash savings to dip into in the event of an emergency, the reality is often very different. More than a quarter of households with at least one person in employment would be unable to cover a three-month drop in household employment income of 25%, according to the Office for National Statistics (ONS, Financial resilience of households; the extent to which financial assets can cover an income shock, April 2020).

So recent months have offered a painful reminder of the need to take preventative steps before a crisis arrives. It brings home to people that if they lost their ability to earn income, perhaps for reasons other than the pandemic, such as becoming sick, there may be a much longer impact than in what we hope will be a temporary economic dip.

Facing up to it
The thought of illness, or indeed other events that might result in a significant loss of income, is one that most of us prefer to avoid. But that approach can leave you facing up to financial difficulties only when they begin to spiral – rather than taking action to prevent them in the first place. Hoping it will go away will just create further long-term problems.

One of the initial worries in the event of an income shock is whether you can keep on top of regular repayments, such as credit cards and mortgages. It’s best to address these as soon as possible. You should be proactive in contacting companies and tell them you are having problems. Providers are required by regulators to be as supportive as they can be, and can temporarily reduce payments and permit payment holidays.

Building resilience
The first line of defence against financial troubles is to build a rainy-day fund that ensures you can cover your regular payments for a while – even if your income falls. But longer-term defences in the form of financial protection are needed too.

One option is insurance, with income protection right at the top of the list. These policies are designed to help you cover regular commitments such as mortgage repayments, rent, bills and other household essentials if you’re unable to work because of illness or an accident. Unemployment can sometimes be included as an ‘add-on’ to these policies. Income protection typically pays out between 50% and 65% of your income if you’re unable to work, and most policies will do so for as long as needed. Payments start after a pre-agreed deferral period (usually of three to six months) has passed.

The most common type of protection insurance in the UK is life insurance, followed by critical illness cover and then income protection – but it should be the reverse. Even if you have critical illness cover and life insurance, you still need a regular income so that you can pay the premiums.

If the cost of income protection is a concern, there are ways of getting it down. For example, policies can be arranged to cover a fixed period of time rather than the rest of your working life. With around 95% of income protection claims ending within five years, shorter policies would still cover most people’s requirements while significantly reducing the cost.

However, the pandemic may complicate matters if you have a pre-existing medical condition and you’re looking for insurance. If you have underlying medical conditions that make you more vulnerable to the coronavirus, it may take a bit longer to get standard forms of protection at the moment. Hopefully once things ease off again, people will remember how that felt and they will act accordingly to get protection in place.

To get help to build a protection plan that is individually tailored to meet your needs, and adapt it to your changing circumstances with regular reviews, please contact Narwal Wealth Management Ltd on 0116 242 6777 or email narwalwealthmanagement@sjpp.co.uk