What is the right amount of Accident, Sickness, Unemployment (ASU) insurance cover?

The rate of UK employment, as per the Office for National Statistics (ONS), was at 76.0% in March to May 2019 compared to the previous quarter (76.1%). This is the first quarterly decrease since June to August 2018. In the March to May (2019) quarter, there were 766,000 people who were unemployed for up to 6 months, 187,000 people who were unemployed for 6 to 12 months and 340,000 people who were unemployed for more than 12 months (source: ONS). Though the job market in the UK has been fairly buoyant despite Brexit fears, there are renewed concerns whether it will get a deal to smooth the shock when Britain leaves the EU. There are concerns about the outlook for big manufacturers against the backdrop of Brexit and slowing global economy.

In the current economic environment of uncertainty, it may take longer to find suitable employment opportunities if you are made redundant for any reason. According to Aviva plc, one in four families in the UK have savings balance of less than £95; loss of income can put these families under severe financial distress. ASU insurance is, therefore, likely to be a critical financial need for large segments of our population to protect lifestyle and assets in the unfortunate event of loss of income due to accident, sickness or unemployment.

What does Accident, Sickness and Unemployment (ASU) Insurance cover?

ASU insurance provides income replacement up to a certain percentage of your income (e.g. 65%), usually for up to 12 months, if you are unable to work due to accident, sickness or involuntary redundancy. You can either buy standalone unemployment cover, an Accident and Sickness, or combined ASU policy. While the cost of a standalone unemployment policy is lower (usually 80% of an ASU policy), an ASU policy provides comprehensive protection. Data from the Association of British Insurers (2017) showed that every year a million people are unable to work due to serious illness or injury. Considering the risks, an ASU insurance policy, is probably the appropriate short term income protection insurance, the slightly higher premium notwithstanding.

Maximum Accident, Sickness and Unemployment insurance cover

The maximum accident, sickness and unemployment insurance cover is limited to a certain percentage of your pre-tax annual income. Further, there is an upper limit on the monthly or annual benefits that the insurance company will pay you if a claim is triggered. The maximum ASU insurance benefits differ from insurer to insurer and also from policy to policy. You may want to consult with a financial advisor to select an ASU insurance policy that meets your requirements in the event of loss of income due to accident, sickness or unemployment.

Insurance customers will want to get the highest possible benefit to which they are entitled and are able to afford; higher benefits (subject to the maximum limits) come at a higher cost. £100 of incremental monthly ASU insurance benefits can cost at least an additional £1 – 2 of monthly insurance premiums. If a claim is triggered (when you are unable to work due to accident, sickness or unemployment) the cost benefit trade-off works in favour of the insured with higher covers. However, if a claim is not triggered, the higher premium is an additional cost every month which needs to be considered before purchase. Therefore, you should put some thought into how much ASU benefit you actually need per month, so that you can optimise costs and meet your requirements at the same time.

Debt and ASU insurance cover

Average household debt in 2018 was £15,400 according to Trade Union Congress; this was on top of mortgage debt. If we include mortgage the average household debt goes up to £58,540 (Source: BBC, June 2018). Overall in the UK, people owed nearly £1.6 trillion at the end of June 2018, up from £1.55 trillion a year ago. Paying student debt (not included in the figure above) is also another significant obligation, especially for young workers. Servicing your debt obligations is the most serious concern if you are made redundant in your workplace or cannot work due to accident or sickness. You must consider your financial liabilities when buying ASU insurance; protecting your assets and your creditworthiness should be the most important consideration. If debt servicing takes up a large portion of your monthly income, then you may have no option but to opt for the maximum monthly benefits in ASU insurance, the higher costs (premiums) notwithstanding. Your monthly ASU insurance benefits should be able to service all your debt obligations and also meet your regular monthly expenses; you should choose your cover amount accordingly.

How to reduce the cost of your ASU insurance

ASU insurance should cover your monthly cash-flow needs. Servicing your debt obligations (credit cards, mortgage, student loan etc.), as discussed earlier, is an important requirement. If you are not a home owner, your ASU insurance policy should cover your rent payments. There are other basic expenses which have to be incurred like utility bills, childcare, food, transportation etc. Your ASU insurance benefits should be able to cover these costs. Then there are discretionary expenses like restaurant bills, sports, leisure, clothing etc. which can be controlled depending on your financial situation.

Monthly cash-flow needs will depend on your personal situation

If you are single, you have greater flexibility with regards to your cash-flow requirements; you can cut discretionary expenses and make changes to your lifestyle to lower your monthly cash-flow needs during the period where you have to depend on your insurance policy claims payout. But if you have a partner, who is financially dependent on you, your flexibility is limited; if you have school age children, your flexibility is likely to be further limited.

Whatever your personal situation is now, you should prepare a monthly budget. You should itemise all your regular expenses (including your debt obligations) and put them into categories like debt servicing, basic living expenses, childcare expenses and discretionary expenses. Critical evaluation of your monthly budget now, may enable you to cut some discretionary expenses during the period you are unemployed or unable to work due to accident or sickness. This will reduce the monthly benefits from your insurer when a claim is triggered and consequently, this will reduce your insurance cost.

Get Jobseeker’s allowance

If you are unemployed but capable of work you may get Jobseeker's Allowance (JSA) from the Government. You must be able to demonstrate that, you are actively seeking work in order to get Jobseeker's Allowance. There are two kinds of Jobseeker's Allowances - contribution based and income based. You will get contribution based Jobseeker's Allowance if you have made sufficient contributions to national insurance. You can get contribution based Jobseeker's Allowances for a maximum of 6 months, after which, if you are still unemployed (and looking for a job), you may get income based Jobseeker's Allowance, if you have not made sufficient contributions to national insurance. The benefit amount in income based Jobseeker's allowance will depend on your income, capital and personal circumstances. More details regarding Job Seeker’s Allowance can be found by visiting www.gov.uk/jobseekers-allowance.

You can get income support if your capital (savings, property, land) is less than £ 16,000; the home you live in, can be ignored, when assessing your capital. Your weekly income is compared to a fixed weekly level which the Government considers is the amount, known as the 'applicable amount, you need to live on for Income Support purposes'. The difference between the applicable amount and your income is the amount of Income Support payable. The Government can also help you towards the payment of your mortgage interest. More details regarding Income and Mortgage support can be found by visiting www.gov.uk/support-for-mortgage-interest.

If you are sick and unable to work, you may be eligible for Employment and Support Allowance (ESA). If you are too sick to work, you can get statutory sick pay (£ 94.25 / week) from your employers for a limited period of time (up to 28 weeks), after which you can claim ESA from the Government. To calculate the amount of ESA you will get, the Government adds up your income from different sources and considers what your needs are. More details regarding Employment Support Allowance can be found by visiting www.gov.uk/employment-support-allowance.

By getting Jobseeker’s allowance and Employment & Support Allowance, you will be able to get some income from the Government / your employer during the period you are unable to work due to accident, sickness or redundancy. This will reduce the amount of the income replacement (monthly benefits) you need from your ASU policy and in turn, will reduce your insurance cost (premium). However, given that ASU cover needs to be in place before any accident, sickness, or redundancy occurs, it would be beneficial for you to know what benefits you may be entitled to before taking out a policy.

Conclusion

In this blog post, we have discussed how much ASU insurance cover you may need to provide you (and your family) income protection if you are unable to work due to accident, sickness or unemployment. Insurance customers should remember that higher cover comes at additional costs. In this blog post, we discussed how much cover you should have at the very minimum and also, how you can reduce your insurance cost by careful financial planning and availing state benefits. You may also benefit by consulting with a financial advisor to discuss the right amount of ASU insurance cover for you.

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