The Magic Box – The need for Income Protection

Box with twenty pound note coming out

I have dedicated this particular blog issue to those of you who are still dependent on income from employment or self employment. Let me tell you about a rather special magic box.

The Magic Box

Imagine for a moment that you have won, not the Premium Bonds or the National Lottery, but a Magic Box.  This box has been wonderfully made by a power that is outside of our human understanding.  What does the box do?  It makes entirely legal £20 notes!  How often does it make them?  It produces one £20 note every hour, 8 hours a day six days a week.   

On one day each week it goes through a kind of automatic servicing routine and produces no notes. So in a year it provides a total of £49,920 in £20 notes.   

How long will it go on producing these notes?  It has the potential to do so for the rest of your life.  What is the catch!  The issue of which you need to be aware is related to the highly complicated nature of the internal workings of the box.  If it goes wrong, which it could do at any time, you may never be able to fix it.  

There is a team of highly skilled engineers who were involved in the original design of the box.  They have made quite a few of these magic boxes and are able to fix them although it can take around three months to do so.  They are prepared to offer you a contract that if your box goes wrong they will get it working again within 3 months.  This guarantee is valid until you reach your State Retirement Age and is irrespective of the number of times that you may have to call them out.   

What is the cost for this contract?  You just have to set aside the first £20 note that the box produces each week and send these notes to them at regular intervals.  You will still be left with forty seven £20 notes every week.  

The choice is yours.  Do you want the magic box that you have won just as it is, or complete with the service contract?  

This is not a figment of your imagination

The magic box is not, of course, a figment of your imagination. The magic box is you!  Through the wonderful facilities your body provides you are able to work and earn lots of £20 notes each week.   

Instead of setting aside the first £20 note each week for the service contract you set up a direct debit for this amount to an insurance company. The insurance company then guarantees you a replacement income of around 50% to 60% of your normal gross income if you are unable to carry out your occupation (or possibly another occupation for which you have been trained).

Because the income is tax free and, as an employee you will also receive incapacity benefit, it will not be too far short of your current net income. If you are self employed you will need to protect a slightly higher percentage of your gross income.  This guarantee continues for the rest of your expected working life no matter how often you need to claim on the policy.   

What is the Risk?

The choice is yours. Before you make your decision it is worth calculating how much income you might expect to earn during the rest of your working life because that is the amount at risk. If you are age 50 and earning £50,000 a year and expect to work until your State Pension Age of 68 then your future income at risk (assuming wage inflation of 2% pa) is £1,070,000.  

If you are presently age 40 the figure income at risk increases to £1,852,560 and if you are age 30 it increases to £2,805,745. Of course, if you are age around 30 to 40 you would be disappointed to think that your income would only increase by 2% pa during the rest of your career.  

Your future income at risk can be a very large sum but there is a simple solution to hand and it is called Income Protection.  

An Example

Paul (it could just as easily be Paula) is age 40 and an administration manager earning £50,000 a year. He believes that he could pay his bills for three months if he were unable to work as the result of a serious illness or injury. For a premium of around £60 a month he could take out an income protection policy that would provide him with £2,300 a month after the first three months until he is well enough to return to work.  

This amount is tax free and he will also receive incapacity benefit of around £500 a month. The £2,800 a month he will receive in total is around 90% of his current net take home income of £3,136 a month. Naturally there needs to be some incentive for him to return to work.  

If Paul were age 30 the premium would be around £39 a month and if he were age 50 the premium would be around £99 a month. If because of his employer’s generosity or his savings and investments Paul believes he could pay his bills for six months then his monthly premium would reduce by around 10%.  

State benefits during a prolonged disability

Many people still seem to believe that the State will look after them if they suffer from a prolonged disability.  The State does have a role in this but it is limited to providing a level of support that anyone in work would find it extremely difficult to live on.  

Certainly the State support does not consider that you need to eat out, have good holidays, buy your own home or send your children to a private school.  In other words if you rely on the State for assistance you are letting a future Government determine how you will live during a period of prolonged disability.  
For further information on life and health products to protect you and your family https://towardsprosperity.org/landingpage/protection/  

Arthur Childs

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