Opinion & Analysis
Kara Gammell: How to protect yourself when renting.
20 Aug 2020
Last week, my friend Kate got her dream job in Suffolk.
Naturally we celebrated her success together, and after the bubbly started flowing, we found ourselves on Rightmove, looking for a new rented flat of dreams.
It didn’t take long to realise that as she will be relocating 140 miles from her current home in Brighton, her money will go so much further – but as she will now be living alone and covering all the costs herself, I suggested that she consider income protection.
Like many renters, the thought had never crossed her mind. For Kate, because she has a significant income, is in her late 30s and does not have kids or a mortgage, she had completely overlooked the fact that she would be vulnerable in this way.
Once I explained it to her, the penny dropped and she was on board. But, the thing was, had I not mentioned it over drinks in my garden, I doubt she would have been prompted at any stage of the lettings process.
And Kate isn’t the only one: the number of renters is rising – and so is their age.
What’s more, for tenants across the country, rent will be their biggest monthly expense – so the loss of income would have a huge impact on their ability to keep a roof over their head.
But an income protection (IP) policy, a type of insurance that would pay out a monthly income should one be too ill to work, could be life changing.
The number of renters is increasing
In the last 10 years, the number of people living in rented accommodation has doubled – and this shows no sign of slowing down.
By 2025, 50% of adults under the age of 40 will be renting privately, according to a study from Legal & General – and gone are the days when renters were simply young homeowners in waiting: today, 35% of tenants are over the age of 45.
And this type of lodging doesn’t come cheap: according to the insurer, the average rent in the UK is £817 per month, rising to £2,059 in London – and this is expected to climb by 15% in the next five years.
Currently, rent accounts for, on average, 40% of a tenant’s income – double the amount a homeowner spends on the mortgage. This is much higher for those renting property in London, where rent accounts for 65% of their monthly earnings.
But while homeowners may see the value for financial protection to cover their mortgage costs should things go wrong, renters often overlook this option and as a result, are left vulnerable should they become ill or injured and become unable to work.
According to research by consultancy Hymans Robertson, only 7% of renters have any individual income protection in place – which could have devastating effects should things go wrong.
Why are renters under protected?
The exact reasons for this reluctance to buy income protection are unclear.
According to unbiased.com, more than 50 percent of tenants have contents insurance, recognising the risk of loss due to fire or burglary.
Yet according to the ONS, the chances of being robbed in the UK are 0.3 percent, while government figures say the chances of a long-term sickness absence are ten times higher, at 3 percent.
So while long-term illness is more likely than losing their home contents, renters are still less likely to insure against it – which shows that if we were looking at our insurance coverage based on odds of actually needing it, we are backing the wrong horse so to speak.
Renting for longer is the new norm
For many, renting is becoming a longer-term option, with the average tenant living in this type of accommodation for a decade.
There are a number of drivers behind this change such as rising house prices, wage stagnation or life changes such as divorce or relocation forcing those who were previously homeowners to move into rented accommodation later in life.
But it’s not just single people that are tenants: research from Royal London shows that 50% of all children born in 2018 were born into rented accommodation.
Should one of the breadwinners of the household become ill, the impact can be much more significant for a family rather than an individual living alone.
For instance, a family that is forced to find more affordable accommodation due to loss of income may need to change schools and childcare but also cope with the limited availability of properties that are suitable for children.
Add to this the increased risk of health problems for older renters and the need for income protection is greater than ever.
“The UK’s renting population can no longer be classed as ‘homeowners in waiting’,” said Richard Purcell, technical and innovation lead at Hymans Robertson.
“Renters are now more likely to be older with more chance of having families and responsibilities so it’s not surprising that these are the renters most concerned about being unable to pay rent due to illness or inability to work.”
High rent means less financial resilience
The economic uncertainty caused by Covid-19 has highlighted a gap in financial protection for renters should they become unable to pay their bills due to a global pandemic.
Unlike mortgage customers who were offered payment holidays due to problems paying their bills, renters found themselves with fewer options other than their landlord’s goodwill.
To make matters worse, few tenants had adequate emergency funds set aside thanks to sky-high bills meaning that a majority of their income simply covers the rent and leaves them with little leftover at the end of the month to stash away.
It seems that for a large number of renters, their only financial back up plan is government help, with Hymans Robertson research showing that a third of tenants plan to rely on state benefits in the event of illness.
But, unfortunately, many underestimate the amount of Statutory Sick Pay which would not be sufficient to cover rent for most people who pay rent.
Lack of signposting to blame?
For most renters, they are simply unaware that there are products on the market that are designed to protect them should they be unable to work as a result of illness or disability.
A quick online search for rent income protection produces contents and products aimed at landlords.
What’s more, at no point during the lettings process are tenants introduced to the financial protection options available.
What is needed by renters?
The needs of renters are, generally, similar to those of mortgage customers, albeit with some small differences.
Renters tend to spend a higher proportion of their income on housing costs than mortgage customers, so the amount of cover required may be higher.
Also, because tenants tend to have a shorter planning horizon, moving often and being susceptible to increases in rent, they will require more flexibility in cover.
Some rental income protection plans, such as the one offered by Legal & General, allow tenants to increase the amount of cover if: their rent increases, they relocate, or they change their tenancy agreement, all without the need to go through underwriting again.
This is called a rental increase option or rental guaranteed insurability option (GIO).
What’s more, if tenants leave the rental market and get on the first step of the property ladder, some policies can simply be transferred without a new medical underwriting plan, enabling you to protect your new home and your investment.
How much cover do you need?
So how can you ensure you are properly protected should you find yourself out of work due to an accident or sickness? How much cover is enough? And how much is it going to set you back each month?
A good rule of thumb should be enough to pay any bills and provide money so your family will be financially secure.
Like any insurance, it is crucial that you shop around before you purchase a policy. If you use an independent financial adviser they can search the whole market for you and offer a range of solutions to suit your requirements and budget. Policies are priced according to your age, general health and the amount you want to receive if you must make a claim. When calculating how much cover you need, it makes financial sense to consider all the monthly outgoings you pay every month.
As well as your rent or loan commitments, you must include those everyday essentials such as council tax, utility bills and the weekly food shop. Fail to do so and you could still end up in debt trying to meet your other commitments.
Also bear in mind that we are all living longer so it is crucial to think past traditional retirement age when taking out a protection policy to ensure that you don’t come up short.
It is also worth considering the changing state pension age as it increases for both men and women to 66 by October 2020. It will rise again to 67 between 2026 and 2028.
It may be tempting to opt for a critical illness policy instead of income protection in a bid to cut costs, but be careful.
While these types of insurance policies complement each other, they do different things and cover different risks so it is important to carefully consider both before making a purchase. If you have a heart attack, for instance, and return to work after six months, a critical illness policy would have paid the lump sum, where income protection payments would pay out for as long as you were unable to work – and for some policies, that could mean monthly payments until retirement should you not be able to return to your job.
How to find the best policy for your needs
The good news is that as with any financial product there are ways to get high-quality cover, without inflating the cost of premiums.
Always choose a policy that insures your “own occupation” – so, if you are unable to do your own job – rather than any work at all because you fall ill, you will still get a payout.
Luckily, this type of cover, while offering better protection, may not be costlier as it is factors such as age, smoking status, occupation, length of policy, deferment period, claim payment period and amount of cover that determines the premium.
Be completely honest in your answers to all the questions on the application, for example your medical history, otherwise the policy could be worthless.
You might feel that you are over sharing, but if you hold something back it could really affect whether the insurer pays out in the event of a claim.
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