‘Kelly’s Know-how’ – May 2020 edition

Protection – Part 1

 

If I say the word ‘Protection’, what comes to your mind?

Maybe with the current situation, you might be thinking of masks, gloves, and hand sanitizers.

These protection tools are used to shield us from invisible enemies, bacteria, and viruses.

However, this article series will discuss different types of protection tool that shield us from enemies that we often fail to acknowledge, namely unpredictable events.

Protect your ‘Human Capital’

Some of us might think that we do not have any valuable assets to protect. Have you ever considered the fact that we all possess one capital in common? That is our human capital. According to Wikipedia, ‘Human capital is the stock of habits, knowledge, social and personality attributes embodied in the ability to perform labour so as to produce economic value. Human capital is unique and differs from any other capital. It is needed for companies to achieve goals, develop and remain innovative.’

In simple terms, our human capital is our capacity to work and produce an income.

Let’s make some simple calculations, if we start working at 18 and retire at 65, we will have a working life of 48 years. According to the Office for National Statics, the current average annual salary is £26,520.

£26,520 x 48 years = £1,272,960

That’s how much our human capital is worth based on average figures; over £1,000,000. However, this capital is paid in instalments, for most of us it is paid in monthly salary. Is your next month’s salary guaranteed? What about next years’? What about your salary for the next 10, 20 or 30 years?

The answer is NO. It depends on you being able to work to gain that salary. What happens if you are unable to work due to illness? You might get some sick pay for a certain amount of time, but after this period, you would not have these ‘instalments of your capital’ paid.

If you own a car, it is mandatory for you to buy car insurance, at least third party cover. The average car value is about £15,000.

If you own your house, you buy buildings and contents insurance. According to the Land Registry data, the average house price is £231,855.

Now, when it comes to ‘Human Capital’, it is not a matter of if you own it because we all possess it. The simplistic example above shows that based on average figures, your ‘Human Capital’ is worth more than £1,000,000. For most of us, it represents the most valuable asset we possess. Wouldn’t it be wise to protect this?

 

The main protection to provide cover for this purpose is Income Protection.

What is income protection?

Income protection is an insurance policy designed to pay out regular income (normally around 60% of your salary) in the event of you not being able to work due long-term illness or disability.

 

How long will it pay out?

It pays the income until you can start working again, or until you retire, die or the end of the policy term, whichever is sooner.

 

What is a deferral period?

It is the waiting period before the payments start.  You generally set payments to start after your sick pay ends or savings run out, or after any other insurance stops covering you. The longer you wait, the lower the monthly premiums.

 

How many times can you claim?

Income protection is also known as permanent health insurance (PHI) because you can claim as many times as needed until the end of the cover.

 

What I would like you to do now is to apply the calculation of the human capital value to your personal situation. Calculate your earnings over your working lifetime. Then, think about if you can afford not to receive some of these instalments (your income) and how that would affect your lifestyle.

Would you be willing to guarantee this income in future, for less than the cost of a coffee a day?

The younger you are, the cheaper the premiums are. You can get yourself covered by finding the right insurance online or on a comparison website, or you can draw on our industry knowledge and experience to help you find the most suitable solution for you and your circumstances.

Last but not least, I practice what I preach, I have protected my ‘Human Capital’, have you protected yours?

Thanks for reading! This is just the first article in our series on protection and your options. I’ll catch you in the next article!