Director of Distribution & Marketing
The ‘Great Resignation’ saw vacancy rates in the UK reach a record high of almost 1.3 million in January this year1, as many people continued to seek roles with flexible working practices or find new employment opportunities in the wake of the pandemic.
However, job switching can place clients at risk of financial vulnerability. By using our income risk calculator at The Exeter, we’ve outlined some scenarios advisers should be aware of. These use hypothetical personas of individuals looking at a career move and the risks they could face if they don’t consider updating or taking out income protection (IP) when they change jobs.
Updating existing policies
Many UK workers are seeking new opportunities to boost their salaries, especially with the cost of living on the rise. However, if they have an IP policy and plan on changing roles, it’s vital that they update their existing cover.
Take, for example, a 36-year-old computer software manager moving from banking to the retail sector, with a salary rise from £48,000 to £56,000. With an average IP policy, they would be entitled to a maximum benefit of 60% of their monthly pre-tax earnings. Yet, if they failed to update their policy to align with their new salary, they could end up missing out on £400 of monthly benefit should they be unable to work and make a claim.
A hit to savings
With the prospect of a higher salary often comes higher expenditure. To keep up with any increase in future expenditure, such as mortgage or rental payments, it’s important to ensure clients’ policies reflect their financial commitments.
Consider the scenario of our computer software manager. Following their salary increase their mortgage/rental repayments and utility bills increase by £300 per month. Failure to update their benefit level could create additional strain on their finances if they were unable to work due to illness or injury.
This could mean they have to dip into their hard-earned savings to cover any shortfall.
Similarly, there will be situations where clients move to a new role for a lower starting salary. In these circumstances it is worth reviewing their policy to consider any reduction in benefit they may receive in the event of a future claim. This may also prompt conversations around their wider financial planning needs.
Dangers for the newly self-employed
The scenarios become more alarming for those moving to self-employment who find themselves without the fallback of employer support, such as contractual sick pay arrangements, an employer IP scheme or statutory sick pay.
Let’s consider the scenario of a newly self-employed plumber, who takes home £2,500 per month and has monthly outgoings of £1,900. With money spare at the end of each month and £16,000 in savings, they could be considered financially secure.
However, if they were taken ill, their income could stop immediately. With their savings, they could probably cover short-term costs. But if they were unable to work long-term their savings would only cover their outgoings for a little over eight months. What is more, they would not be entitled to government support in the form of Universal Credit as they would be over the £16,000 savings threshold.
Given the average IP claim for policies with full-term claim periods at The Exeter is almost 24 months, the financial implications of illness are clear.
As many clients undergo career transitions, outlining the importance of taking out or updating an IP policy should be a priority for advisers. By initiating discussions on IP with clients that have shown an appetite for a job move, advisers can better ensure their financial security in the future.
This article was first published in Health & Protection on 25/03/2022.
1 - www.gov.co.uk