Stability and security: the base layer of your financial wellbeing programme

Published 7th November 2018 by Investors in People

Financial security: understanding why it comes first

Mercer consider financial wellbeing to comprise two pillars: financial security and financial freedom of choice, both in the present and in the future. Freedom of choice is built on financial security (you can’t make informed choices if you can’t to some extent predict future costs) as well as additional factors such as a healthy approach to cash flow and spending.

Financial security must therefore come first. But how do we create financial security? Or rather, what does financial security entail? Financial security is mostly concerned with, in Mercer’s words, ‘the ability to absorb a financial shock.’ From an organisational perspective, this means reducing the impact and incidence of financial shocks, whenever they happen.

What employee benefits contribute to financial security?

Death-in-service cover

This is a financial safety blanket that provides a lump sum payment, typically three or four times annual salary, if an employee dies while employed by your organisation. The payment is usually tax-free. It is not dependent on death being caused by the work itself or while the employee is at work: they just have to be on the payroll.

Unlike life insurance policies, employees can’t specify to whom they want the payment to be made upon death. They can provide their wishes, but these are advisory only and contingent on agreement by the executors of the estate. Empowering your staff to make wills is therefore strongly encouraged if you offer this benefit.

Critical illness cover

This product typically provides a lump sum payment if employees are diagnosed with a disease or illness specified within the policy. This money can be used for various needs, such as paying for treatment, making up for lost income or funding a new lifestyle made necessary by the diagnosis.

Critical illness cover significantly reduces the potential double financial impact of being unable to work and family members needing to give up their own income to provide care. It could also be used to pay off significant debts – such as mortgages – to ease the ongoing financial burden.

Income protection insurance

This is similar to critical illness cover but has key differences. The FT notes that, in general, income protection insurance “pays the ongoing bills” while critical illness cover “pays off the debts.” If employees cannot work due to accident or illness, income protection insurance pays an ongoing income until they are able to return to work.

Income protection insurance typically includes a ‘deferral period,’ which is the time between when a claim is made and when payments begin. The length of this period is a significant factor in how much the policy costs. Its relevance comes down to how long your employees can sustain their debts and lifestyle if their income collapses. Organisations should take advice on what length of deferral period is suitable for the needs of their workforce.

Some people think income protection insurance provides more of a safety net because it is linked to inability to work due to any illness or accident (with a few contractual exceptions), whereas critical illness cover is only invoked upon meeting the shorter list of diseases defined in the policy. However, the right policy depends on the needs of your workforce and what your organisation is trying to achieve.

Private medical insurance

In exchange for monthly premiums, private medical insurance provides access to medical services for acute conditions for which short-term treatment is required. If staff can’t work due to a health issue, the costs would be roughly equivalent on the NHS compared to private cover, but the reduced waiting times and access to potentially more appropriate treatments could reduce the recuperation time needed before they return to work.

Most private medical insurance policies do not provide cover for pre-existing, chronic conditions for which constant treatment is required, such as diabetes. However, one benefit of many policies is that employees can pay to extend the cover to spouses and children, providing the reassurance of shorter waiting times and access to treatment for the whole family.

Health cash plans

These policies are not private medical insurance, but instead allow staff to reclaim typical health expenses throughout the year, such as dental check-ups and routine work, eye exams and physical therapy costs.

Health cash plans provide a double benefit: firstly, they help staff better predict future financial costs. Secondly, they reduce overall outgoings, because employees are essentially only paying for costs temporarily before recouping them from the provider.

These policies are also good because they encourage better overall wellbeing: someone with financial worries may not seek physical therapy for an injury due to the costs, but with a health cash plan they may do so and therefore recover quicker.

The ‘stability and security’ conundrum

The problem organisations face with these types of financial benefits is that, by definition, a safety net sits quietly in the background, waiting to spring into action when needed. This means these benefits aren’t in the forefront of your employees’ minds, which means the positive wellbeing effects of having a security blanket fade over time as staff inevitably habituate to the benefit or forget they have it.

So the challenge for employers is two-fold: the first is to increase uptake by selling employees on the benefits of the policies (or ‘nudging’ them to sign up when their minds are focused on finances, such as sending reminders with electronic payslips). The second is to remind them of their ‘ongoing safety net’ to reduce worry and anxiety about how they will cope if the worst should happen.

Long documents detailing the benefits of these policies will rarely get read or absorbed – even if they are, they are too theoretical to have the kind of emotional impact that helps assuage financial worries and makes people feel more secure. Short posters with imagery, reminding employees of the policies and what they provide, are effective methods and can be placed in high-traffic areas, such as break rooms.

Financial wellbeing and mental wellbeing are inextricably linked. Since you’re focused on the financial wellbeing of your employees, take a look at our article on how you can help your staff stop bringing work stress home with them.