According to a range of research papers, people are putting their financial futures at risk through their lack of preparation for the future. David Ryder explains

The Money and Mind report, produced by Schroders Personal Wealth (SPW) and Warwick University Business School in late 2020, revealed that UK adults scored 24 out of 25 for how they managed their debt. That score plummeted to just three out of 25 against preparing for the unexpected.

Combined with Legal and General’s Deadline to Breadline report, published in February 2021, and the implications of this lack of planning become stark.

The main point is this: the average mortgage-holder thinks that they would be financially OK for around 90 days if they lost their income tomorrow. The stats in the table below show that they would actually be heading for the breadline in less than one-third of that time.

 Average private renterAverage mortgage holder

Average age

36

44

Children at home

49% none

49% one or more

Annual salary

£28,486

£44,159

Monthly cash after paying for the basics

£700

£800

On other essentials

£500

£500

Truly disposable monthly

£200

£300

Savings

£936

£4,313

Debt

£735

£1,729

Saved monthly

£200

£300

Biggest financial asset

Savings (24%)

Property (62%)

Days they think they could survive on savings

30

90

Days they actually would survive

3

23

Higher than average “need”

Petrol / holidays

Smoking / media subs

Have income protection

2%

14%

Source: Legal and General, Deadline to Breadline, February 2021

The same report shows that only 14% of those people have income protection insurance, echoing the findings from the Money and Mind report.

Why do so few people have financial protection in the form of insurance?

To some extent, it could be scepticism on the part of the consumer, who may be thinking “the insurance company won’t pay out” or “the premiums will have risen because of COVID-19”.

The pay-out statistics are, in fact, reasonably reassuring. According to research commissioned by Pacific Life Re in 2017, four out of five people believe that insurers pay out less than 80% of life insurance claims. The most recently available data from the Association of British Insurers shows that an average of 98.3% of claims were paid out across all protection products in 2019.

In terms of premiums, Alun Beyon, Protection Specialist at Scottish Widows Protect, notes that premiums within his company have not increased as a result of COVID-19. One of the reasons he states for this is that the demographic affected most by the virus have been the elderly and infirm, and thereby not adversely affecting the core pricing assumptions that apply to them.

But there are other reasons. According to a further independent study commissioned by SPW, 20% of UK adults say that they don’t have sufficient knowledge to get themselves appropriately protected.

This is understandable when one considers the terms used for the different types of protection how to best go about deciding the best way to select the right policy.

The main types of protection insurance are:

  • whole of life insurance – pays out on death no matter, how old the policyholder
  • term life insurance – pays out on death over a fixed period of time (e.g. 25 years)
  • critical illness cover – pays in the event of an illness, such as cancer or a stroke
  • income protection – pays in the event of your being unable to work as a result of injury or illness

But do you need protection insurance? 

Obviously, the answer to this question will vary from individual to individual, but the Money Advice Service has an arresting response: “Each year one million people in the UK find themselves unable to work due to a serious illness or injury.”

This takes us back to my opening point about how unprepared people are for unexpected events. The answer will be different for everyone, depending on their income, health, family members and more.

In short, it’s complicated. This is why Alun Beynon is a big advocate of getting advice. “By taking professional advice, you’ve a much better chance of paying for insurance that is tailored to your needs and those of your family, ensuring they are protected in the event of the unexpected happening,” he says.

The conclusion is simple. Are you or your clients prepared for the future? Rather than making a guess at what’s best for your individual circumstances, it would seem that professional advice could help to protect you and your loved ones while not spending too much or buying the wrong type of protection.

David Ryder is head of investment content at Schroders Personal Wealth.

The Law Society partners with Schroders Personal Wealth to help you potentially achieve your goals with a personalised financial plan. Their qualified advisers will work with you to understand your wants and needs to build a financial plan that’s unique to you.

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