This week marks Debt Awareness Week, an initiative run by debt charity StepChange to encourage people to talk more openly about debt-related issues. Even before the pandemic, people in the UK owed £1.5bn (May 2019), with the average total debt per household at £59,708. With the Coronavirus pandemic sadly taking its toll on many financially, research shows almost eight in 10 adults have carried debt into 2021.
However, when we think of debt, we typically think about outgoings such as credit card bills, mortgage or rental payment arrears, or perhaps payments due on outstanding loans. But what we often fail to consider is how people’s ability to manage their finances, including debts, can quickly change should there be an interruption to their income, for example as a result of an unexpected illness that means they cannot continue to work. With half of us now expected to receive a cancer diagnosis in their lifetime, and one in four experiencing a mental health issue of some kind – a problem exacerbated by the pandemic – this could all to easily be an eventuality for any one of us.
Skating on thin ice
The Covid-19 pandemic has thrown the vulnerability of losing an income overnight even further into the spotlight. Indeed, at the height of lockdown, more than 1.7 million loans, credit cards and store cards were on payment holidays, whilst 65% (2.2m) of the eligible self-employed workforce claimed for financial support through the Self-Employed Income Support Scheme (January 2021). It’s fair to conclude, that as a nation, we simply aren’t prepared for financial shocks.
The reality is, as financial life support from the government dries up, individuals will need to think about the longer-term, more sustainable solutions to losing an income. While the treasury and industry bodies have been right to provide ongoing backing to the millions impacted financially by the pandemic, this must be the wake-up call we need, to prioritise financial protection.
The simple answer? Income Protection (IP). IP exists to add an extra layer of protection should an illness lead to a loss of income, therefore preventing people from falling into debt as a result of not being able to meet priority bills, or perhaps getting themselves into further debt by needing to rely on credit.
The Exeter’s risk calculator reaffirms the role a loss of income can play when it comes to debt, estimating that a full-time employed worker earning £35,000 a year, having a mortgage or rental payment commitment, two months’ full sick pay and no savings – is vulnerable to accumulating around £16,000 worth of debt within 12 months after sick pay ends. If this person was self-employed, with no access to sick pay at all – the picture would look even bleaker.
Although it seems an obvious solution, people are not seeing the wood from the trees when it comes to IP. The Exeter’s research confirms this, showing that nearly a fifth of self-employed workers have no savings to fall back on whatsoever, yet less than one in ten have an IP policy in place. There is clearly a disconnect in that despite ongoing financial pressure and continued uncertainty, many working adults are not turning to the insurance sector to protect their income.
This attitude simply must change. While it’s human nature to try to avoid giving too much thought to all the challenges life can throw at us, if we’ve learnt anything over the past year, it is that we are all extremely vulnerable to a change in circumstance at any time – and we can no longer afford to take such a blinkered view.
Advice remains key
The Covid-19 crisis has made income security a much more pressing issue. As such, the ongoing challenges presented by the pandemic and events such as Debt Awareness Week provide a good opportunity for advisers to discuss the need for IP with clients.
Good financial advisers are already familiar with the duty of care they hold when it comes to educating their clients about the need to protect their most valuable asset – their income. But support from the industry is needed, and providers must focus its efforts on giving intermediaries the tools, innovative products and information they need to help them discuss this type of cover with their clients in an effective way.
Let’s not lose this once-in-a-generation opportunity to close the protection gap in the UK.
Steve Bryan is director of distribution and marketing at the Exeter