ONE of the most pleasing developments in the financial services industry over recent years is that more and more people are proactively approaching planners for holistic financial planning advice rather than simply focussing on individual financial products.
The holistic approach provides clarity as to one’s financial goals and objectives and creates an overarching financial plan.
During these financial planning conversations one aspect that jumps out at me is the reliance on our income to maintain our standard of living, and also our difficulty in quantifying the long-term value of that income. When considering their financial plan, I ask the clients that I deal with to look at two different types of capital as follows:
Financial Capital – this is the financial assets that you have accumulated up to this point in your life. Typically, the closer you are to retirement the greater this will be, peaking at retirement age and gradually being worked down from there.
Human Capital – this is our ability to earn income into the future, or our future unearned income to put it another way. Picture a couple where both are 38-years-old, earning €40,000 each per year and hoping to retire at 65. This couple’s future gross income is €1,080,000.
This human capital should be viewed as an asset and be protected accordingly. Our future plans from mortgage repayments to holidays, pension and savings pots that we hope to accumulate, to school fees are all reliant on this income continuing into the future.
A good financial planner will not shy away from beginning these conversations. It may be more exciting to talk about savings and investment goals and the stock market returns, but all these goals fall by the wayside if your income unexpectedly stops and has not been protected. A good protection package for a family will include Life and Serious Specified Illness Cover, but it is income protection in particular that I wish to focus on.
According to research, two out of three workers in Ireland do not have an independent source of income to call on should they be unable to work due to an illness or injury.
Most are reliant on sick pay from their employer and then the State Illness Benefit, which at a maximum of €208 per week will not leave much behind once the mortgage is paid.
The situation can be even more difficult for the self-employed. Not only will their income cease completely if they are unable to work, they also do not qualify for the State Illness Benefit. The benefit that they can apply for is called the State Invalidity Pension, to qualify one must be out of work for 12 months and the bar to pass to qualify is also higher.
Having an income protection plan in place will allow you to protect up to 75% of your salary providing that financial cushion for you and your family should you be out of work due to illness or injury.
If our 38-year-old employee with a €40,000 salary example is out of work due an illness or injury without income protection, then gross weekly income would be restricted to €208.
With income protection in place the gross weekly income would increase to €577, and this will be paid for as long as the claimant is out of work and will go a long way to keeping the show on the road.
Income protection is hugely important for people of all ages and the right plan will not only cover you while you are unable to work, but it will also help you get back to work through assistance programmes.
The following statistics were sourced from the Aviva Claims Department in 2021 in respect of their 2020 claims in Ireland only: 92% of all new claims made were paid; Aviva paid €45m to approximately 2,000 claimants; 41% of claimants were male with 59% being female; The average claimant was 48 years of age with 56% of claimants being under 50 years of age; The youngest claimant was 23 years of age; Aviva invested over €200,000 towards rehabilitation and retraining which benefited over 100 clients.
I encourage people to look at their income as an asset and to consider how a sudden stop to their income would impact on their future goals and objectives, and finally to seek out a good financial planner that will tailor a protection package to meet your needs.
• Adrian White is a financial planner with FDC Group within the West Cork region.