Those who rent their homes are running higher risks that they won’t be able to maintain their monthly payments, in comparison to homeowners. But affordable income protection is now being designed with renters in mind. Article by Nick Green.
Fewer than one in 10 people in rented accommodation have insurance that would cover their rent if they were unable to work due to illness – and few have any other realistic options for doing so. This puts renters at considerably more financial risk than people with mortgages.
This is according to a new report by actuarial firm Hymans Robertson, which highlights one of the biggest hidden dangers facing ‘Generation Rent’. UK homeowners are already known to be under-protected, with just 58 per cent of mortgage holders having life insurance in place, while under 30 per cent have critical illness cover or income protection1. However, this still puts them far ahead of renters, who are already at a financial disadvantage due to owning no equity and being reliant on their landlord. People who rent therefore have an even more pressing need to protect their incomes.
‘Rent for life’ – the reality of long-term renting
Renting in the UK is growing – not in popularity as such, but in necessity. The 10 years from 2007 saw a 60 per cent increase in the number of households renting, bringing the proportion to 20 per cent of all households. This is expected to grow to one in four homes by 2021. Overwhelmingly the largest factor in this rise has been the soaring cost of property relative to salaries – in parallel with the growing cost of renting, which makes it ever more difficult to save up a deposit.
As a result, the popular conception of renting as a brief stepping stone on the road to home ownership is starting to shift. The Hymans Robertson study found that the average person renting has been doing so for 10 years, while more than a third of renters are now aged over 45. For many, renting is becoming a permanent or at least very long term situation.
One of the ironies of renting has long been that it tends to cost more per month than paying off a mortgage – without the corresponding benefit of building up a valuable asset. In London, for instance, up to 65 per cent of salary is commonly spent on rent, compared to 45 per cent on mortgage repayments. This means that even a brief drop in income can make it hard to meet the rent.
Renters are misjudging the risk of illness
So how are renters managing this risk? The evidence suggests that most simply aren’t. A majority of renters admit that they would have to rely on savings, state benefits or their partner’s income, or else move back in with family, should they find themselves long-term sick. Given that such options would rarely be realistic, most of these respondents are effectively saying, ‘I don’t know what I’d do.’
‘People who rent have similar protection needs to those who purchase their accommodation, but fewer of them purchase cover,’ says Mark Jones, Product Director for UK Protection at Legal & General. The exact reasons for this reluctance are unclear. Over 50 per cent 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 per cent, while government figures say the chances of a long-term sickness absence are ten times higher, at 3 per cent. This risk rises further with age, so is of particular concern for the growing proportion of renters who are 45 or over.
For their part, renters seem aware that long-term illness is more likely than losing their home contents, yet are still less likely to insure against it.
How could renters protect their monthly payments?
Many renters may be unaware that the same kinds of protection used by mortgage holders are also available to those who rent. Income protection and/or critical illness insurance can cover a period of lost earnings due to poor health, while life insurance is invaluable for families. Given that the monthly cost of renting is often higher, renters may need slightly more cover, but can use the same basic products.
Such insurance is also more affordable than most seem to think. The Hymans Robertson report asked renters what they would be willing to pay for a certain level of protection, and nearly 4 in 10 were willing to pay up to £20 a month. In reality this would be more than adequate: a 40-year-old non-smoker could get insurance that would pay out a monthly income of £1,167 for a year for just £17 a month (if one were to compare an emergency savings fund, it would take over 40 years to save up the total payout of £14,004 at a rate of £17 a month at 2 per cent interest).
The cost of income protection is therefore acceptable for a large proportion of renters, and probably within the means of many more. There are also signs that the insurance industry is waking up to the specific needs of the rental market, and tailoring new products to suit.
‘I love you, you pay my rent’
It appears that it isn't the cost of income protection that deters renters from taking out this insurance. The most likely explanation is a simple lack of awareness, along with the absence of a clear ‘moment’ when insurance is considered necessary. When a person buys a house or a car, insurance is a routine part of the process, but not so when a person rents. Craig Brown, director at Legal & General Intermediary, puts it succinctly: ‘Rental payments are every bit as important as mortgage payments to a household’s finances, but tenants don’t have the natural trigger of a mortgage application to consider protection.’ Mark Jones admits that historically, ‘the products available in the market didn’t adequately consider these consumers’ specific needs’.
Now providers are starting to catch up with the growing demand, among them Legal & General which has recently announced its rental protection plan (RPP). Like standard income protection, in the event of income loss for health reasons this will pay out a monthly sum that can be used for rent (or any other purpose). Life insurance and critical illness plans will also be available, designed to suit the specific needs of renters.
Other providers are expected to follow suit, with more innovations such as making it easier for renters to alter or move their insurance when their circumstances change – as they are likely to, far more frequently than for a homeowner. Shorter cover terms will also be beneficial, since renters tend to plan their lives on shorter timescales.
‘The UK's renting population can no longer be classed as “homeowners in waiting”,’ says Richard Purcell of 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.’