Financial planning and pension information Hub

Resetting the safety net

COVID-19

The current COVID-19 pandemic has put a focus on the link between health and finances like never before. At the time of writing, 29th April 2020[1], there are over 3 million cases of COVID-19 globally, with an unbelievable 200,000 deaths. From a positive point of view, nearly half a million people have recovered from the illness.

In the UK, we have seen over 157,000 cases and more than 21,000 recorded deaths due to COVID-19 as of 29th April 2020.[2]

Economically, the Office of Budget Responsibility (OBR)[3] has predicted that the UK economy will shrink by 6.5% in 2020 with unemployment reaching around 7% by the end of the year.

Not since the Second World War has the world faced such a wide-reaching event and the repercussions are likely to last many years.

Reluctance to insure

Before this pandemic, when speaking to clients about taking out personal insurances, the responses were often lukewarm – no one ‘likes’ paying for insurances. If we drive, we have to take out car insurance, but people will often be more willing to insure their pets, their holidays and their homes ahead of insuring the most important thing they can – themselves.

Behavioural biases play a huge part in an apparent unwillingness to think of the worst case happening to them. ‘Present’ bias – valuing short-term financial rewards over longer-term savings – lead us to postpone seemingly ‘unpleasant’ tasks, such as saving a pot of money in case we get ill, compared to more pleasant ones now such as holidays, shopping or going out.

Another common bias is ‘overconfidence’, the attitude that ‘it won’t happen to me, I’m never ill’.

According to some predictions, over 80% of the UK population will suffer from the effects of COVID-19. With the harrowing statistics we have seen on a daily basis in mind, will these attitudes and beliefs over invincibility change?

Emergency fund

You’ll have heard the saying “saving for a rainy day”, but what does that mean to you? Unemployment? Illness? Accident? Death? And how many of us actually save for that day? It is recommended that households maintain savings of around six months expenditure in case of emergency.

But, according to a recent survey[4], 15% of Brits have no savings at all, whilst one in three people in the UK (or 8.5m households) have £1500 or less set aside as a financial safety net. Based on UK households average outgoings, this would last just three weeks should they lose their income unexpectedly.  One in five admit their household wouldn’t survive financially if they lost their income due to long term illness.

So why do we not save more? There’s no doubt there are significant challenges to savings with low or irregular incomes perhaps being the greatest of these. Particularly with younger demographics, saving a ‘rainy day’ fund seems either unachievable or lower down the list compared to saving for a home, paying off debt or simply paying day to day bills. Often, the reasons for not saving can be psychological.

According to government statistics, in 2018;

  • 4 million working days were lost because of sickness or injury, equivalent to 4.4 days per worker in the UK.
  • one in two people in the UK born after 1960 will be diagnosed with some form of cancer during their lifetime[5].
  • Between 2015 and 2017, there were 164,901 deaths from cancer in the UK.
  • Approximately one in four people in the UK will experience a mental health problem each year[6].

So whilst you may think it won’t happen to you, those who have suffered from these illnesses or accidents probably thought the same. The events of 2020 add a further dimension to this.

Pandemic

With the outbreak of the new coronavirus, those who felt ‘indestructible’, are likely to suffer, or certainly know someone who has suffered from the virus. The economic impact has been immediate and is likely to be long-lasting. Even those who have not been made redundant are feeling the impact as there are millions of workers who have been affected by the government’s  ‘furloughing’ scheme as well as the self-employed who have seen income stop overnight.

Government support

If you are unable to work due to ill health, you can claim a number of benefits provided by the state. Statutory Sick Pay is paid for up to 28 weeks but is unlikely to provide sufficient income to prevent you falling into difficulty. Universal Credit has replaced six previously existing means-tested benefits but, again, is unlikely to provide the income you would want.

So how do you protect yourself? Motor insurance will help pay for car repairs should you have an accident, pet insurance will help pay for vet bills and travel insurance will help pay costs if your holiday is cancelled. Put simply, personal insurance insures you!

How does it work?

Working in a similar way to other insurances, there are three main insurances that will help financially protect you and your family on that rainy day;

Income protection

Income protection will provide you with a monthly income should you be unable to work due to accident or sickness. It can complement any sick pay arrangements you have through your employer, by deferring the start date until any sick pay ceases. The benefit usually continues to be paid until you return to work, retire or pass away.

Critical Illness

Should you suffer a serious illness such as cancer, stroke or a heart attack, a critical illness policy can provide a lump sum that can be used to reduce the chances of you falling into financial difficulty. Often these policies are used to clear any outstanding mortgages – allowing you to concentrate on getting better rather than worrying about losing the family home. However additional funds can be provided to make any necessary alterations to your house, take a holiday to recover or simply providing a financial cushion to fall back on.

Life Cover

Should the ultimate happen, and you or a loved one pass away, a life insurance policy would pay out a lump sum. Again, this is often used to clear outstanding debt, but could be used to replace you as an income generator should you pass away, pay for child care in the absence of a parent or allow the surviving loved one to take time off work.

Myth-busting

But these insurances never pay out… right?

A common myth thrown at insurance is that the policies don’t pay out, with the small print showing caveats and ‘get outs’. However year after year the statistics show that billions of pounds are paid out with claim rate percentages consistently in the high 90s. Thousands of families and beneficiaries are financially supported by these claims following unexpected bereavements or illnesses

And what were these claims for? In 2018[7];

  • 4% of critical illness claims were for cancer,
  • 5% for mental health
  • the average age of an income protection claimants was just 44.

Summary

Despite all of this, just one in ten of us have a critical illness policy, one in four have life cover. It’s never nice to think about the darker things in life but the pandemic we are suffering in 2020 has made it almost impossible not to consider the impact both on our health and our finances.

Can you really afford not to?

If you require guidance or advice on this subject, please contact Broadstone’s Personal Financial Planning team on pfp@broadstone.co.uk

Sources:

[1] https://www.bbc.com/news/amp/world-51235105

[2] https://www.bbc.co.uk/news/uk-51768274

[3] https://obr.uk/coronavirus-reference-scenario/

[4] https://www.finder.com/uk/saving-statistics

[5] https://www.cancerresearchuk.org/health-professional/cancer-statistics-for-the-uk

[6] https://www.mind.org.uk/information-support/types-of-mental-health-problems/statistics-and-facts-about-mental-health/how-common-are-mental-health-problems/#.XcvRnFf7Rpg

[7] https://www.aviva.co.uk/adviser/documents/view/pt15943c.pdf