Mortgages

Furlough isn't that different to Income Protection

We explore the similarities between furlough payments and Income Protection to help protect against the unexpected.

Furlough and Income Protection (IP) – the similarities:

“If you think about it though, furlough isn’t that different to income protection.”

Just as Covid‐19 has given us a world full of face masks, hand sanitiser and ‘super spreaders’, it’s also given people the chance to think about their personal finances. At the peak of the pandemic, furlough was a reality that hit over a quarter of the UK’s workforce*. This word ‘furlough’ that originated from 17th century German and was used to describe paid leave granted to soldiers, was suddenly thrust into the mainstream, talked about in the news, amongst friends, and became part of everyday conversation.

If you were to earn £30,000 per year and were put on furlough at 80%, your monthly earnings would be £2,000 before tax. With income protection, you could be covered for 65% of your earnings, £1,625 per month – but this would be tax free.

The concept of income protection can be a tricky one (with only 20% of people having a good understanding of what it actually covers).** This is where our recent experiences and familiarity of the word ‘furlough’ can help explain income protection more effectively. Simply put – income protection is like a “personal furlough scheme that you set up for yourself in case you’re unable to work due to illness or injury”.

Some of the features of this ‘personal furlough scheme’ include:

Benefit Guarantee

If life has taught us one thing over the last 12‐18 months, it’s that the unexpected can happen and does. The workplace has changed for so many people, grappling with the challenges of working from home, pets walking over keyboards and home schooling. Even for those lucky enough to still be working, their income may have reduced. It’s an uncertain future for many in their working lives. This is where benefit guarantees on income protection can help.

Benefit guarantee is there to help make sure that if your income reduces, your monthly income protection benefit doesn’t necessarily need to, so you can continue with the lifestyle you’re accustomed to without necessarily making cutbacks.

Aviva’s Income Protection+ has a £1,500 per month benefit guarantee. This means that, providing you are working for at least 16 hours a week before you are incapacitated, if you have a monthly income protection (IP) benefit of £1,500 or less – even if your wages or hours go down – your IP benefit will remain the same.

For those with a monthly benefit of over £1,500, Aviva do things a little bit differently to most other insurers and offer an enhanced benefit guarantee. Aviva will pay the full monthly benefit amount if your maximum benefit amount on your reduced earnings (65% of the first £60,000 of your gross earnings plus 45% of anything above £60,000) is equal to or more than 90% of your benefit amount. If your maximum benefit amount on your reduced earnings is less than 90% of your benefit amount, Aviva would pay the higher of £1,500 per month or your benefit amount.

For example:

  1. Sara earning £70,000 pa has a benefit of £3,625 per month on her IP+ policy.
  2. When Sara needs to make a claim, her earnings had reduced to £56,000 per year. Maximum benefit on these earnings gives a monthly benefit of £3,033 pm which is less than 90% of Sara’s benefit amount.
  3. Therefore, Aviva’s benefit guarantee will pay Sara a benefit of £3,033 pm.

Aviva want to be fair to all their customers, so they’ve not singled out any specific occupations for their enhanced benefit guarantee.

Hospital Benefit

We are all acutely aware of the amazing job everyone in the NHS has done over the last 12‐18 months, but what many of us may have feared from the pandemic is being so ill that we need to be admitted to hospital. As of 4th April, 458,863 patients had been admitted to hospital due to Covid‐19.***

The hospital benefit that Aviva offer as standard on their Income Protection+ product pays out £100 per night if you are hospitalised for at least 6 consecutive nights. Aviva understand however that some may still incur or have a loss of income whilst in hospital which is why they backdate the payments to day 1 and will continue to pay the benefit for up to 90 days.

Whilst they can’t remove any fears around ending up in hospital, the hospital benefit can help by offering a financial buffer.

Speak to a Countrywide Mortgage and Protection Consultant today for a personalised quote and to discover how Aviva’s Income Protection+ product has been designed to protect against the unexpected.

Sources:

*https://www.ons.gov.uk/businessindustryandtrade/business/businessservices/articles/comparisonoffurloughedjobsdata/march2020tojanuary2021

**The Association of Mortgage Intermediaries, The new protection challenge November 2020

*** https://coronavirus.data.gov.uk/details/healthcare

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