Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
The 7 best ways to protect your income
Hope Brotherton
1st May 2020
Being without your salary and still having bills to pay and a family to look after is a terrifying thought for anyone. But, there are things you can do now to protect your income and keep yourself and your family going if you were to lose your job.
Read on for our seven invaluable ways to protect your income and put your mind at rest in a post-pandemic world.
- 1. Set up your savings safety net
- 2. Take out income protection insurance
- 3. Get mortgage payment protection insurance
- 4. Get critical illness cover
- 5. Set up extra ways of making cash on the side
- 6. Get some training on the side
- 7. Set up passive streams of income
1. Set up your savings safety net
Having a savings safety net is absolutely essential to protect your income. It’s your very own insurance, which is the most reliable form to have. You won’t need to depend on anyone else for your money, as you are insuring yourself with your own emergency fund.
In your savings, you should have enough money to cover your expenses for at least three months, ideally six. Yes, that is going to be a substantial amount of money, but it is so, so important to have this savings account.
Why? Because if you suddenly lose your job or you can’t work due to illness or other problems, you can at least pay your bills and keep a roof over your head.
There’s also an added bonus. If you don’t lose your job, you still have a nice wad of money quietly earning you interest in a savings account that you can enjoy in your retirement.
So how do you set up this savings safety net? Well, you need to open an easy-access savings account with the best interest rate you can get. Then, put as much money as you can spare into it each week.
2. Take out income protection insurance
If you don’t have an emergency fund, then an option you could consider to protect your income is income protection insurance (also known as permanent health insurance).
Each year, one million people find themselves unable to work because of a serious illness or injury. If you’re unable to work because of poor physical or mental health, income protection insurance will replace some of your salary.
WARNING! Thousands of employees are covered by employer provided income protection. Be sure to check with your employer before you take out individual income protection.
Good policies will pay out until you’re ready to return to work, even if it’s a few years, or retire. You won’t receive your full pay cheque, but you can expect to receive two-thirds of your pre-tax earnings.
Usually, you’ll have to wait before you receive benefits. This is normally the four-week mark. You can get policies that will pay out from the moment you’re off work, but the monthly premiums for those are much higher.
The best way to get this kind of insurance is to shop around, as there are many different policies on the market. Before you start shopping, check with your employer to see if they’ve taken out employer provided income protection.
Redundancy insurance
If income protection isn’t enough to protect your income, you may be thinking: should I get redundancy insurance?
No. We don’t think you should.
Why not? We think it’s expensive and in many cases it doesn’t pay out when you need the cash.
Redundancy insurance, also known as unemployment insurance or redundancy cover, is supposed to provide a payout if you lose your job.
The idea is that redundancy insurance will pay out if you lose your job because of an involuntary redundancy. On the whole, you’ll get paid about 70% of your income. Some policies will cap the limit and they have a maximum benefit of £1,000-2,000 a month.
Remember, you can’t claim if you’ve chosen voluntary redundancy or if you’re already in redundancy talks.
If you do manage to get a pay-out, you must be able to prove that you’re actively seeking work. Once you’ve proven this, you’ll get the benefits for 12 months (24 months with some policies). But after that you’re on your own.
In addition, you have to wait for one or two months before you start to receive the benefits of the policy. There’s also a qualifying period of 120 days before the policy is valid. In other words, if you take the policy out now and you get made redundant next month, you won’t qualify for the money. On top of that, you have to be continuously employed for at least six months before you can make a claim.
If you’re keen on protecting your income against redundancy, you’re better off with the next point….
3. Get mortgage payment protection insurance
If your savings safety net is still a work in progress and you have a mortgage to pay, then you should seriously consider mortgage payment protection insurance (MPPI) to protect your income.
WARNING! Don’t just get the insurance offered to you by your mortgage lender. Figures from the Council of Mortgage Lenders show that of the borrowers who have MPPI, three-quarters took out the cover with their mortgage provider. These ‘bolt-on’ policies tend to be more expensive.
As well as looking at the price of MPPI, you need to be aware of exclusions with the cover. Many MPPI policies will exclude stress and back trouble, which are two of the most common reasons for claims. Ideally, you should find a policy that includes these conditions.
Also find out if there’s an ‘excess period’ before the policy starts paying out, or whether the provider offers ‘back to day one’ cover. MPPI normally pays out between 30 and 60 days after you become unable to work and continues to pay the benefit for 12 months (sometimes 24 months).
Be aware that claims will not be met if you knew you were likely to be made redundant when you took out the policy.
Don’t forget! – MPPI may sometimes be cheaper than income protection.
Once again, because there are so many different policies out there you need to shop around.
4. Get critical illness cover
Critical illness is one of the most pessimistic form of protecting your income. But it will be a huge relief not to worry about money should you be struck down with a long-term disease.
Critical illness insurance is a long-term insurance policy that covers serious illnesses listed within a policy. For example, stroke, heart attack, certain types of cancer or conditions such as multiple sclerosis.
WARNING! Thousands of employees receive critical illness cover as part of their employment package, so make sure to check whether you do before taking out a policy.
Some types of insurance will give you ‘level’ or the same pay-out during the policy term. In other words, you could get a lump sum pay-out if you get ill at any time while the policy runs.
However, it is possible to buy cover where the lump sum gets smaller over the five years – and this sort of cover is cheaper. This type of ‘reducing’ critical illness cover is designed to be used with decreasing home mortgage repayments. Less and less cover is needed as the mortgage gets paid off.
If you’re self-employed, or you don’t have critical illness insurance as part of your work benefits and you are the only or main earner in a household, it is worth considering this type of cover for a few key years. The cash can be a major boost if your health goes wrong.
5. Set up extra ways of making cash on the side
Having a bit of extra money coming in from somewhere other than just your day job is a perfect way to protect your income. We don’t mean getting a second job, we’re talking about easier ways to make some money.
Check out our top ten easy ways to make quick cash for starters – it’s the most popular article on our site!
There are tonnes of other easy ways to make money from things you enjoy doing, and you really can turn them into regular little earners without too much trouble. For loads more money-making ideas from house-sitting to being a car boot king or queen, click here.
6. Get some training on the side
Brush the dust from your CV and take a long hard look at it. Do you have a host of transferable skills? What about a second language? A good knowledge of different IT programs? Don’t worry if you’re drawing a big fat blank at this point, because now is the time to get yourself some new skills – for free.
Want to start learning a new language? Then head to BBC Languages. You can learn a language for free with their great courses and you’ll even get a certificate at the end! The BBC also has free online media training courses too.
7. Set up passive streams to protect your income
N.B. these are long-term ideas. They’re unlikely to help you in the next twelve months. However, to protect yourself in the future, it’s worth setting up at least one of these now.
With passive streams of income you’re talking real money – regular money. Setting up one of these means creating something that will pay you year after year, later on, with minimal effort on your part.
This all sounds great, of course, but be aware that in order to create this lovely stream of money in the future, you’ll have to put some effort and money in now…probably quite a lot of it.
Here are a couple of activities that could provide you with a regular income later on:
Your own web business
This is such a big subject that it would take a whole book to explain how to do it properly. However, why not start small now by setting up your own blog. It’s free (just go to Blogger.com to do it) and you can start making a very small amount of money by getting Google AdSense on it.
You could even write a blog about redundancy if that’s what you’re going through. As we’ve shown in this article on making money out of misery, you can turn a bad situation into gold if you try.
Invest in shares
While you might think this is a terrible idea, investing in the stock market is actually a very reliable way to make money in the long term. If you are willing to invest for at least five years, and ideally more, you can see some pretty impressive returns.
Put money in regularly – each month or each year, whatever you can manage – and sit tight. Don’t be put off by hysterical news reports about the stock market tanking, just keep quietly investing. Over time the stock market will go up, even if it drops wildly in certain years.
Check out our section on Investing and Investments here. You’ll find all you need to know about to get started.
For more ideas on how to make quick money – click here.
But, how do you avoid the cowboys? Company House show all registered UK enterprises (It might be Companies House). Some are registered in other countries, and many just want your bank account details. All too easy if you’re a bit desperate.
You made some good points there. I did a search on the topic and found most people will agree with you