PROTECTION GAP – What is it? Do you have one? And if so, what size?
Written by Sam Barrie on February 17, 2016.
The term 'protection gap' as defined by Swiss Re is - ‘The shortfall in the amount of cover necessary to maintain the current living standards of dependents’
The formula is very simple:
PROTECTION GAP = resources needed – cover in place through individual policies and employer sponsored group life cover
On this basis, recent calculations have shown that the UK has an estimated protection gap of a staggering £2.4 trillion! This is inclusive of income and business protection which far too frequently have levels underestimated or even more worryingly, neglected entirely. Last year Swiss Re estimated that Income protection based on banded earnings has a protection gap of £200 billion per annum, and according to Legal and General in 2013, the business protection gap could be as high as £1.3 trillion.
There are a number of reasons for this. Firstly, affordability. The cover needed by many businesses and individuals alike could have an expensive premium and will often not take priority over alternative expenditure.
Secondly, lack of awareness. This unfortunately is the biggest reason people are uninsured/underinsured and need to have their liabilities addressed by an experienced Financial Adviser. In the UK, it is not a political priority to have mortgage loans backed by life assurance cover and as a result, a high percentage of these loans are without any cover at all.
Another key reason is that the UK’s highly developed welfare state has led many people to believe that the ‘state will look after you’ and so insurance isn’t needed. This is absolutely not the case and although support is currently available, for the majority of people it is not sufficient enough to cover their needs and with the ever tightening of government expenditure, it simply cannot be relied upon.
So, do you have a ‘Protection Gap’? There are numerous factors to take into account when calculating this such as; what stage you might be on the lifecycle, the number and ages of your dependents, mortgages or any other loans you might have, your current Inheritance Tax liability, the capital requirements should you become unable to continue working.
Protection is always the first thing I address when I meet people for the simple reason of it being the most important. Nobody believes the unthinkable will happen to them but the harsh reality is that it does happen and cannot be foreseen, so we all need to make sure that we’re adequately protected just in case.
To calculate your shortfall, please book a non-obligatory consultation by emailing me at firstname.lastname@example.org