Last year, the average UK resident had approximately £6,757 in financial savings, a concerning figure when balanced against the £2,548 the average household spends per month to cover basic living expenses. With less than three months of bills saved for a rainy day, any loss of income due to ill health or injury could threaten to upend household finances, particularly if people also need to service debt. So, what can advisors do to extend this grace period for their clients?
Threadbare safety nets
Whilst all of us are guilty of sometimes adopting an ‘it will never happen to me’ attitude, it’s estimated that each year one million people in the UK find themselves unable to work due to a serious illness or injury. The truth of the matter is that no one knows exactly what’s around the corner, but there will still be bills to pay, including rent or mortgage payments, electricity bills and groceries. And in an age of rising costs of living, in particular for energy bills, clients may not have the same buffer of savings they expect.
In fact, the figures paint a clear image: whilst the average UK resident has £6,757 in financial savings, one third of adults have savings of less than £600 and one in ten Brits (9%) have no savings to fall back upon at all. Indeed, the average total debt per adult in the UK stands at £32,931, accounting for around 109.3% of average earnings. Few employers support their staff for more than a year if they are off work due to illness and the state benefit safety net is hardly enough to maintain the average person’s lifestyle, let alone pay debts, with Statutory Sick Pay currently sitting at £96.35 for up to 28 weeks.
Even clients with higher-than-average savings – more likely to engage the services of an adviser – can struggle if caught unawares.
A shield at the door
Income Protection (IP) can provide an extra layer of protection should an injury or illness lead to a loss of income, preventing consumers from falling to debt as a result of not being able to meet bills or getting themselves further into debt by relying on credit.
Research from The Exeter has found that less than a fifth of working adults in the UK have an IP policy in place, highlighting how few are turning to the insurance sector to protect their income – their most important asset.
This attitude must change, and advisers are on the forefront of making this happen. Whilst it’s human nature to try to avoid giving too much thought to the challenges life can throw at us, when it comes to finances, forward thinking is vital. Covid-19 has thrown into sharp relief that we are all vulnerable to a change in circumstances at any time and that we can no longer afford to rest on our laurels.
Kickstarting conversations
So how can advisers best serve their clients when it comes to managing debt?
While advisers are already familiar with the duty of care they hold when it comes to educating clients about the need to protect their income, collaboration will be key to ensuring people get the financial protection they need. Encouraging clients to talk with family can also pay dividends in providing a full picture of the household level of debt and what breathing room clients may have from existing savings and investments if income is lost.
The protection industry also needs providers to play a decisive role in 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.
For example, at The Exeter, our income risk calculator can be used to create a personalised report that highlights how debt can accumulate should an IP policy not be in place. A full-time employed worker earning £35,000 a year, with 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.
There is still much to be done to ensure that people are protected against unmanageable debt that results from a fall in income. Income is the most valuable asset any client has, but so few turn to the insurance sector to protect it. Now is the time for the industry to work together to ensure everyone has the financial safety net they deserve.
Steve Bryan is director of distribution and marketing at the Exeter