12/04/19Is your income protected until retirement?
As part of the financial planning process, you may have considered ways to safeguard your income and lifestyle from unexpected events. In some cases, this may have meant taking out a protection product to provide a level of income should something happen. However, an investigation by a newspaper suggests that policies taken out previously may not cover you until retirement age.
Income Protection is a policy taken out to deliver a regular income should something happen, such as being unable to work due to illness or injury. Whilst it’s an important part of securing your financial future, it’s something that’s often overlooked. In fact, according to research from Legal and General, just 9% of people associate the term ‘protection’ with Income Protection and Critical Illness cover.
There are many different types of financial protection products and choosing the one that’s right for your circumstances is an important part of the financial planning process. Among the key considerations when selecting protection is ensuring that the term of the product is appropriate, this includes the period in which you can make a claim and how long it would pay out for if you needed it to do so.
Typically, Income Protection products will pay out until you’re able to return to work or when you retire, providing you with financial security and peace of mind. However, new research suggests that income paid through policies could stop sooner than expected, leaving a shortfall.
Why are there concerns about Income Protection?
The issue relates to changing retirement ages. Over the last few years, the State Pension age for women has increased from 60 to 65, equalising with men last year. Both men and women are now seeing gradual rises in their retirement age, it will reach 67 by 2028.
But how does this relate to Income Protection? Over a million Brits have their own Income Protection and 2.5 million are covered through a scheme offered by their employers. However, policies that were intended to run until State Pension age now may no longer do so because of the rises. This could leave policyholders with a gap in their income when an Income Protection policy stops paying out, but they are still too young to claim the State Pension.
Recent news coverage has highlighted the issue, speaking to some of those affected, who claim they had no prior warning their Income Protection payments would stop before State Pension age from either the government or insurer.
What should you do?
If you currently have Income Protection and are worried about the level of cover and term, there are some things you can do:
1. Contact your policy provider: If you have concerns about a current policy, the first action you take should be to get in touch with your provider. They’ll be in a position to clarify exactly when your policy will run to and what it’ll cover; either putting your mind at rest or signalling that some further action should be taken to secure your financial future.
2. Read the terms of your policy: We often don’t read the full terms and conditions of a policy and they can be confusing. However, when you have worries, they can provide you with the answers you’re looking for. Going through the terms should give you a clear response as to whether an income gap could occur in the future.
3. Regularly review your policy: Whether you uncover a shortfall or not, this is a critical step to take. As your circumstances change, from retirement age to divorce, the level of financial protection you need may also shift. Committing to looking over your policy frequently, with your financial plan in mind, can mitigate the risk of holding a policy that isn’t appropriate.
4. Understand how it fits with your wider financial plan: How essential is the protection product you hold? Without it would your lifestyle be harmed, or do you have other assets that you can fall back on if needed? As with all financial decisions, it isn’t one that should be looked at in isolation. Understanding how protection aligns with your wider financial plan can help you make the right choice for you.
5. Consider alternative cover: Should you discover a potential gap in your cover that could leave you financially vulnerable, you may want to consider an alternative product, either replacing or supplementing the existing one.
6. Make other provisions to cover a potential gap: There are different options to taking out further cover too. If, for example, you discover a potential income gap of 12 months, it may make financial and practical sense to add to your emergency fund instead. Taking a look at your existing assets and how accessible they would be should you need them can give you confidence in your situation, even if there is a risk of an income gap.
If you’d like to discuss either personal Income Protection products you’ve taken out or those provided through your employer, please contact us.