LONDON: It’s most families’ worst nightmare: the main breadwinner loses their job and all of a sudden the mortgage or rent becomes difficult to pay and the family is at risk of losing their home. While some people can rely on state benefits as a safety net if they experience a sudden loss of income, for many the drop in income is too severe to maintain their standard of living.

People are three times more likely to fall ill or suffer a serious injury during their working lives than to die, according to insurer Unum. Chief executive Peter O’Donnell says: “One in 10 people in the UK go on long-term sick leave during their working lives, yet 90 per cent have no financial back-up plan to protect them.”

However, there are ways you can ensure your income is protected if the worst happens and not all of them cost the earth.

Save money

One way to protect yourself against a sudden drop in earnings is to build an emergency fund when times are good. Financial advisers recommend you have a sum equivalent to at least three months’ salary or essential outgoings available in an instant-access savings account. So if you spend £2,000 (Dh11,008) a month on mortgage or rent plus food, energy bills and other things you can’t live without, you should aim for £6,000 in your emergency fund. The theory is that if you lose your job, you can afford your home and essentials while you look for alternative employment.

Fixed-term savings accounts or bonds have higher rates than easy-access accounts, but you must lock your money away for a set period to receive the higher rate; if your job situation is so precarious that you might need instant access to your savings, this isn’t for you.

Check what government and employers offer if you become sick or die at work.

While some people can rely on state benefits as a safety net, for some it will mean their income falling by half or more.

In some countries, your employer cannot give you less than the statutory amount, but you might be able to get more if your company has a sick-pay scheme. A third (34 per cent) of UK private companies offer sick pay, but how much employees receive sometimes depends on how long they have worked for the firm and their seniority only 4 per cent of companies pay full salary for six months.

“Protecting yourself doesn’t have to mean spending more,” explains O’Donnell. “Benefits from your employer can offer the best-value protection, reducing the cost to you and providing a greater level of cover. You are also unlikely to be refused cover as part of a workplace scheme, for example because of pre-existing conditions.”

Your company might also offer a death-in-service lump sum payment should you die while working. This is typically worth three or four times annual salary, but the cover expires as soon as you leave the company.

Insurance

To protect your family comprehensively, you should consider insurance especially if your employer does not have an occupational sick-pay scheme.

Income protection provides a regular replacement income if you have to go on long-term sick leave for six months or more and pays up to 80 per cent of your salary until you can return to work or retire.

Critical illness cover provides a tax-free lump sum payment to enable you and your family to solve some of the financial problems that may occur if you become seriously ill or permanently disabled. You must normally survive for a specified period of time (for example, one month) after becoming critically ill, before the policy will pay out.

Life insurance is a tax-free lump sum that provides financial security for your dependents in the event of your death.

Also known as accident, sickness and unemployment cover, or ASU, payment protection insurance covers the cost of loan repayments or minimum monthly credit card payments if you are too ill to work, or made redundant. It’s sometimes called MPPI mortgage payment protection insurance when it’s specific to mortgage payments. PPI has been hugely controversial with thousands of people claiming for mis-sold policies, but there are now safeguards covering the way it is sold and it can be suitable for some people.

How to choose insurance

Protection plans are needed for different reasons. Life assurance is not “better” than critical illness; while critical illness is not better than income protection they are all different and which you choose should be based on your circumstances.

Ray Black, independent financial adviser at Money Minder, says: “It’s important to have life assurance and CIC side-by-side to cover all your outstanding debts. CIC is expensive [because a claim on CIC is more likely than death].

“If you can’t afford to cover all your debts with CIC, consider life cover at 100 per cent and maybe 50 per cent of that amount for CIC — it’s better than nothing. And remember, most commonly, ‘life assurance plans’ and ‘life or earlier critical illness plans’ are used to provide a lump sum payment, not an ongoing income.”

When you’re looking for something to cover the financial implications of someone in your household being unable to work (or provide care for your children) because of an accident or illness, income protection plans are best.

“There’s been a lot of coverage about the mis-selling scandals of PPI, MPPI and ASU plans,” adds Black. “If the ‘unemployment’ part of these plans is not important to you, longer-term income protection plans (that could end up paying out an income to you right up until retirement) are by far the best option for many.”

If you are self-employed or a contract worker, the situation is somewhat different. Insurers usually do not offer cover to people who do not have a consistent income.

— Guardian News & Media Ltd