Safety ring being thrown into shark-infested water

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Employee or employer: why protection is vital

In the event of being unable to work due to injury or illness, employees must ensure they’re covered. Employers must think about their staff, themselves and their business

Long-term ill health and injury can have a profound and enduring effect on an individual.

The situation is challenging for both employee and employer. The employee’s financial situation may become precarious, giving great stress at a time when they should focus on getting better.

Meanwhile, employers must – to some extent – bear the financial burden of a person’s absence, but also manage the workload that remains. There may also be legal complexities as well as some difficult decisions.

The employee

Many won’t find out if they have financial provision in place to cover long-term absences until it is too late. If that provision is inadequate, it may necessitate long-term lifestyle changes, such as moving home, or changing their children’s schools. 

Financial strain is associated with poor mental and physical health, and can become self-reinforcing. Studies suggest that work is essential to health, well-being and self-esteem. When ill health causes long-term sickness absence, a downward spiral of depression, social isolation and delayed recovery make returning to work less likely.

This is particularly profound in certain types of people – those who place their work as central to their identity, for example, or who face criticism from friends and family. Psychologists recommend acting quickly to ensure that symptoms do not escalate.

Know where you stand

However, prevention is better than cure. Ian Tomley, chartered financial planner at NFU Mutual, says that employees should look at their situation ahead of time: “The first step is to establish what your employer would provide if you were unable to work through illness or injury,” he says. “Some employers may continue to pay your full or part salary for a fixed period, which may vary depending on length of service.”

Income Protection

It is worth checking existing insurances to see what (if any) cover they provide and for how long. Any shortfall can be made up with Income Protection cover. This can provide an income when someone is forced to stop work, but only for longer-term absence rather than minor ailments such as colds.

It can be made cheaper by having a longer ‘deferment period’ – the period of time that must pass before the income is paid out. This will only work for those who can cover their expenses for a few months if they are off work without pay. The pay-out is normally tax free, therefore many policies will only cover 60% of pre-tax income.

This type of cover is particularly important for those without any protection from an employer. The self-employed or small business owners are particularly vulnerable if time is lost due to illness or injury.

“If the worst were to happen, many people have ‘death in service’ cover with their job,” says Tomley. “Some occupational pensions also provide a guaranteed income to a spouse and / or dependents if you die. Many other pension schemes will pay out the fund built up on death.”

It is also important to look at what your dependents would need in terms of capital and income in the event of your death. This will be different for everyone, so it’s important to get the right advice.

The employer

In 2016, an estimated 137 million working days were lost due to sickness or injury in the UK. Although around 25% of these were for minor illnesses, such as coughs and colds, the remainder were more long-term. Musculoskeletal problems cost 30.8 million days (22.4%) and mental health issues cost 15.8 million days (11.5%).

This is a challenge for businesses, with colleagues having to pick up the extra work. It is also often necessary to continue paying the person on sick leave.

Employers should ensure the business is protected, particularly if the death of a key employee could affect the long-term profitability of the business. They can take out ‘key person’ insurance, which would pay a lump sum helping the business to secure the necessary temporary skills and help with recruitment costs.

Company policy

In partnerships or owner-managed companies, if one of the partners or shareholders dies or is long-term sick, then the other partners or shareholders may want to buy their share.

They need to ensure that the partnership or shareholder agreement covers this situation and sets out an agreed formula for buying the business. But this should be an ‘option’ and not a binding contract, which would mean losing valuable IHT relief.

Each partner or shareholder would normally take out life insurance and critical illness cover under trust to the others. In the event of one of them suffering death or a specified critical illness, proceeds are paid to the other business owners. The proceeds can be used to help buy the shareholder or partner’s share of the business.

Protection in numbers

  • Statutory sick pay is £89.35 per week for up to 28 weeks. (Source: UK Government)
  • In 2016, the average age of AIG critical illness claimants was 46. (Source: AIG Life)
  • Almost £500m was paid out in income protection claims in 2016. (Source: Association of British Insurers)
  • 3.1 million in the UK aged 50+ are living with a serious illness. (Source: International Longevity Centre) 

GET IN TOUCH

If you are thinking about protection, speak to your local NFU Mutual Agent or phone 0800 056 0142 (select option 3) and we will put you in touch with your personal Financial Adviser. 

NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers. We’ll explain the services and charges.