By Kesh Thukaram, Director, www.bestinsurance.co.uk
The protection gap in the UK has been a cause for concern ever since the Payment Protection Insurance (PPI) mis-selling scandal soured the reputation of this product and its providers in the decade after the turn of the millennium.
PPI, where properly sold, is an invaluable financial safety net; it ensures those with mortgage or loan commitments can continue with their repayments for up to a year, should they lose their income due to an accident, sickness or unemployment.
Within the mortgage sector, a joint initiative between the Association of British Insurers (ABI) and the Council of Mortgage Lenders (CML) to improve take-up of Mortgage PPI resulted in over one in five, 21%, of all new and existing mortgage loans insured by the end of 2000. When segmenting for new mortgage holders, this figure jumped to 33%.
Following the mis-selling debacle, low sales figures have stopped industry bodies recording the data (the last recorded figure is from the CML in 2008 when 22% of mortgages had such cover). Such is its demise, a survey undertaken by Usurv.com in March 2014 suggests only 2.7 per cent of borrowers taking out a new mortgage and 5.4 per cent of existing borrowers have a policy to fund their monthly repayments if they lose their salary.
The fragility of household finances and how easily a lost salary can tip homeowners into debt is evidenced by debt charity Step Change. It suggests nearly 40%[i] of home owners struggle to pay essential bills. Those without savings to rely on will be unable to ensure continuity of their mortgage payments should they fall ill or be made redundant, and without the financial support of a policy, they’re more likely to default on their mortgage and face repossession.
In the face of income adversity, few options are available. The appalling scenario of over 90% of mortgage borrowers with no back-up plan if their salary goes is not so much a gap, it’s a chasm.
So who can we turn to during times of adversity? Given short-term income protection (re-named to distance itself from PPI) has yet to resolve its reputational issues, those who suffer a loss of income, either due to redundancy, an accident or illness, will invariably look to the State for support.
If you lose your job, there’s the Job Seeker’s Allowance (JSA) and for those suffering an illness or a disability, Employment & Support Allowances (ESA) and Personal Independent Payments (PIP). Cuts to these payouts, however, mean they cannot be considered robust financial safety nets.
Jobless homeowners have the Support for Mortgage Interest (SMI) scheme to turn to. But changes which took effect from 1 April means claimants now have to wait 39 weeks (over nine months), as opposed to the previous 13 weeks, before they receive any payments.
Paid directly to the lender, the Government pays the mortgage interest on up to £200,000 of the loan. In December 2015, the Office for National Statistics put the average house price at £288,000, so while this support may make a small dent in some two-thirds worth of mortgage interest, the payment, which is likely to be low, will be a long time coming.
I understand the rationale for not wanting to encourage a benefit-reliant society, but dramatic changes to our support models are needed in order to help those with financial commitments continue to pay their bills and avoid falling into debt should their circumstances change. Housing costs alone are unlikely to be sustained by benefits and this is before other bills are taken into account.
It’s clear the Chancellor- who in the March Budget pledged to put the UK in a surplus situation by 2020 – is keen to reduce the level of publicly-funded financial support to the bone; the recent cuts to PIPs which commentators suggest will leave 200,000 people £3,000 a year worse off is testament to this. If the State is averse to providing such support, we must look elsewhere, so why not employers? In the US, this model works and it can do here.
US businesses are required by law to pay for workers’ compensation insurance (carried through a commercial carrier, on a self-employed basis or through the State Workers Compensation Insurance Program) and some States require employers to provide partial wage replacement to eligible employees for non-work related sickness or injury.
The partial wage replacement cover appears most prolific in private industry with, according to the US State Department of Labor, 93% of workers covered by fixed duration plans. Workers are not required to contribute to their long or short term disability plans; across all sectors only 18% pay into short-term cover and 6% long-term. In The onus, it appears, is on the employer to provide the benefit.
Unemployment insurance tax is mandatory. The Federal Unemployment Tax Act (FUTA) authorises the Internal Revenue Service (IRS) to collect a federal employer tax to fund State workforce agencies. Paid annually, the tax is taken from employers who have at least one employee working 20 weeks in a calendar year, paying wages totalling $1500+ (around £1000) in any quarter of the calendar year.
FUTA covers the cost of administering the unemployment insurance and job service programs in all States, pays half the costs of extended unemployment benefits (during periods of high unemployment) and provides a fund from which the State may borrow, if necessary, to pay benefits.
Each State administers a separate unemployment insurance program and is free to determine eligibility, benefit amounts and the length of time the benefits are paid. In general, claimants are required to have worked for four out of the last five completed calendar quarters before they make a claim. Similar to the UK, claimants are required to report to job centre equivalents and be proactive in searching for work.
Benefits and the payout timescales are based on a percentage of the individual’s earnings over a 52 week period, up to the State’s maximum limit, and the number of quarters worked.
The idea of relieving the pressure on the public coffers and requiring employers to fund accident, sickness and unemployment payouts is something we should investigate further. Why is it not mandatory for employers to offer asu insurance as part of their employee benefits’ package and so increase the woeful figure of eight per cent or so of workers with such cover? Perhaps the Chancellor should consider funding the support people need through taxation.
Business leaders may well balk at the thought of another tax, but desperate times call for desperate measures. People do not have the capacity to save; the Money Advice Service says four out of 10 UK adults have under £500 in savings and ING bank suggests 28% of UK adults have nothing.
The Chancellor’s recent bid to get us all saving with his Budget offer of a 25% bonus on a Lifetime Isa is all well and good, but it will not resonate with those who are struggling to pay everyday bills. If the State is unable to help people without savings keep up with their mortgage and rental repayments when a salary goes, we must look at a more socially-responsible model.