When everything suddenly changes – why protection matters

We never know what’s just around the corner.

The combination of inflation and rising taxes is leaving UK households worse off, with disposable incomes predicted to fall by 7%.

This means that any rainy-day savings will likely be shrinking or even vanishing due to the need to cover living costs. According to Legal & General research, the length of time households could cover basic living expenses if they lost their income has fallen to 19 days.

What’s more, almost half (43%) of adults worry about losing their income because of illness or injury. That makes the need for protection insurance policies, such as Income Protection, all the more important.

That none of us knows what the future holds has been driven home emphatically in recent years. Any complacency about the stability of household finances has surely been wiped out by the developments that have unfolded since the turn of the decade.

The threat posed by the COVID-19 pandemic had only just begun to recede when Russia’s invasion of Ukraine last February ushered in another period of crisis. Both events, along with developments including the escalating effects of climate change, have had a direct impact on household purse strings, contributing to a spike in fuel, food and other prices that sent UK inflation to a 41-year high in late 2022.

Inflation has begun to fall again since the start of 2023; however, households continue to suffer the effect of high prices. Almost one in ten adults said they often or sometimes run out of food, according to Office for National Statistics research published in February. Around half said they were buying less when food shopping, and around a fifth reported struggling to keep ‘comfortably warm’.

For many households, any rainy-day savings will likely be shrinking or even vanishing altogether, in order to cover living costs. UK Chancellor Jeremy Hunt raised taxes in November, lowering the 45p Income Tax threshold and extending a freeze on allowances and thresholds for Income Tax, National Insurance and Inheritance Tax.

The Office for Budget Responsibility warned at the time that household disposable incomes would fall 4.3% in the 2022/23 financial year and by 2.8% in 2023/24, the sharpest declines on record.

Why do you save money for a rainy day?

There are certain things households can control. But when it comes to inflation, interest rates and government tax policy, household finances are vulnerable to even modest changes.

When we factor more personal life events into the equation, such as illness, accidents and bereavement, the case for having some form of safety net in place becomes even more compelling.

It can take years to build up those emergency funds, but a matter of days or weeks to deplete them. In some cases, one household crisis could empty out the rainy-day fund entirely.

“The recommended amount of savings for an emergency fund is three to six months’ expenditure, and that can act as a buffer between jobs or see you through higher living costs,” says Alex Cleanthi, Head of Protection at St. James's Place. “But you can’t rely on it for a long period of time.”

That means many households, whether or not they’ve been able to build up rainy-day funds, are dependent on the income they receive to keep coming in.

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Research by Legal & General found the length of time the average household could cover its basic expenses has fallen five days since April 2020 to just 19. Yet most people overestimate how long their savings will last, typically assuming they would be able to manage for 60 days in the event of losing their job.

“We often think there will be alternatives if we lose our main income, but without really considering how quickly our savings could go and how reliable those alternatives really are,” says Alex.

Why do I need protection insurance?

If the worst does happen, protection insurance policies, such as Income Protection and Critical Illness insurance, are invaluable. The former is designed to help cover outgoings such as mortgage repayments, rent, bills and other household essentials in the event of you being unable to work because of illness or an accident.

It typically pays out between 50% and 65% of your income after a pre-agreed deferral period (usually three to six months) has passed, and most policies will do so for as long as needed.

Critical Illness insurance is designed to pay out a lump sum on the diagnosis of certain specified critical illnesses or medical conditions. Yet although 43% of working-age adults worry about the impact of losing an income, just 17% have Income Protection in place (or are applying for it), according to data from The Exeter.

We’re much more likely to take out insurance on material goods, such as mobile phones and household contents, than we are to protect the income that pays for those products, says Alex. “Protecting yourself, your standard of living and your health is far more valuable than protecting your material possessions. The impact of losing an income is so much greater,” he points out. “If you’re the main household earner, it can have a huge impact on you and your family if you aren't able to work."

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“The question isn’t whether or not to get protection insurance, but whether you can afford to live without it in the event of not being able to work,” says Alex. This is especially the case if you’re self-employed and don’t have any of the cover or benefits that an employer might provide, he adds.

“There is an element of working out what’s most important to you in terms of outgoings, and then looking at what you’re prioritising above something like protection insurance,” he says. “The main thing about protection insurance is that it gives you peace of mind.

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