No savings and fearing redundancy? Many are in this position and are being forced to consider what they would do if they lost their job. State benefits are minimal. Job Seekers Allowance is £64.30 per week (£50.95 for those under 25). The standard rate for Statutory Sick Pay is just £79.15 per week, payable for a maximum of 28 weeks and the Employment and Support Allowance benefit starts at just £68.95 a week.
Compare this to:
The average family monthly grocery bill is £428 (Retail Food Consortium June 2010) Council Tax is £120 per month for the average band D home (Telegraph March 2010) The average annual combined gas and electricity bill is £1000 (Money Saving Expert)
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The Centre for Economics and Business Research (CEBR) in March 2010 were reported to have calculated that the average UK household had a net income of £552 a week. The basic cost of living figure was £403 per week leaving nothing for discretionary spending.
When people lose their job they cannot simply switch off the level of payments and expenses associated with their existing working lifestyle. Whilst everyone has different bills and out-goings, the summary of this research suggests that the average household is likely to need £1500 to £2000 per month to just meet their existing commitments and avoid spiralling debt.
Redundancy, even with some months warning, can be upsetting enough. Most people also find they are enduring an emotional roller coaster. It is the worst possible time to be making decisions about how to cope financially, as another job might be anything from a week to a year away. Therefore, no one knows how much money they will need until another salary actually starts coming in. According to the Office of National Statistics (August 2010) of the total 2.46m people registered as unemployed and seeking work, 48% have been out of work less than 6 months. Unemployment between 6 and 12 month duration was 19.6 percent. Worryingly however 32.3 percent have been unemployed for a year or more.
For a sole earner who was out of work for six months, they would need between £9,000 and £15,000 just to pay their regular bills. Plus, the prospect of potential long term unemployment and mounting debt becomes an increasing possibility.
What can be done to avoid serious debt?
Typically, following redundancy, people will look to cut down. For example, an existing car loan can be a major issue for someone thrown out of work. The knee jerk reaction is to say sell the car. However, the likely depreciation in its value would mean barely paying down the debt. Worse still, for many jobs, the use of a car is essential. There are also family commitments to consider. Collecting children from school, visiting elderly relatives or attending hospital appointments, all usually demand access to a reliable car. Busy people cannot put the life of their family on hold whilst looking around for another job. This comes at a cost.
Those with more than £10,000 readily available in their bank account, if they were feeling brave, could gamble on getting another job in less than 6 months. Even if this money represents their life savings, it will avoid them entering into a spiral of debt and worry. When unemployed, the importance of having the funds to meet regular bills cannot be under emphasised, as it offers the freedom to concentrate on finding alternative work.
For many finding the right job is a further concern. Maintaining self esteem is critical. It is just as important to get the right job and not to be financially driven to take the first thing that comes along. This is another reason for having the funds to fall back on, giving the job seeker time to find a new role at the right salary. Equally, most people want to avoid jobs that they know are highly stressful, or for which they are personally unsuited. Being forced to take part time work, because nothing else is available, can create personal unhappiness combined with a serious decline in living standards.
No savings? There is an alternative
Provided a company has not made redundancies or announcements about cut backs, the people employed by them are eligible to buy Unemployment Insurance. Most take this out as a substitute for having savings in the bank. Policies with £1000 a month benefit can be bought on-line for a premium of about £35 a month. The same cover can cost at least double from banks and building societies (Source: Money Saving Expert Guide to MPPI Insurance). It is well worth shopping around for a good deal.
The proposition for Unemployment Insurance is simple. Without savings, or only enough to get by on for a few months, it is far easier for an individual to take out an insurance for £35 a month, than to try and save up anything like the funds needed to pay their bills in the event of redundancy.
The advantage of Unemployment Insurance is that it pays out, usually for up to a year, if the policyholder is unable to work. Most of these policies cover accident and sickness as well redundancy. Anyone working more than 16 hours a week can buy this cover including the self employed.
Most of Unemployment Insurance policies also provide the services of re-employment specialists to help get another job. They assist with locating vacancies, completion of a modern CV and preparing candidates for interviews. It can make a huge difference having expert help, rather than the individual battling away alone. The better providers also include 'Carer Cover,' this pays a large lump sum if the policyholder has to give up work to look after a relative.
Unemployment Insurance is available under two categories:
The first is Mortgage Payment Protection Insurance which is designed to cover the cost of mortgage repayments plus usually up to 25% more for household bills. This is usually the best value cover because there is stiff competition for this business from mortgage brokers, lenders and especially the low cost on-line providers. The second category is Short Term Income Protection or Lifestyle Protection Insurance as it is frequently called. This Lifestyle cover enables people to pay any number of bills, though it is usually limited to a maximum of £1500 to £2000 benefit per month.
How to get good value
Dennis Haggerty the Marketing Manager of on-line specialist i:protect commented. "Our customer research shows that people who buy Unemployment Insurance usually have some savings, but their money will not last if they are out of work for more than two or three months. On average, people select policy benefits of around £1000 per month. This is good value as it is enough to pay the essential bills leaving state benefits and savings to meet day to day expenses."
Unfortunately Banks and Building Societies are hard to recommend as a place to buy this insurance. They were criticised by the Competition Commission and heavily fined for miss-selling this type of product in the past. Lloyds Bank have now withdrawn from the market. In contrast major insurers such as Aviva and LV continue to strongly support this sector that is now strictly regulated, though their premiums are not the cheapest.
Money Saving Expert's guide to MPPI is very useful for consumers and explains where to seek out the best deals. In addition, Mortgage Insurance on the Money Supermarket website is a good place to compare low cost on-line providers. Otherwise try specialist brokers or an IFA if previous employment or medical history requires individual consideration.
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