Ask any financial adviser and they will tell you that the first priority if you have dependents should be to ensure they would have enough to survive financially if you die.
The need to protect yourself in the event of being unable to work because of an accident or long-term illness comes a close second, particularly if you are self-employed.
The slightly misleading name for policies which offer such protection is permanent health insurance, or PHI. This is a form of cover which aims to replace most, or at least a part, of your income if you are unable to work because of illness or disability.
The logic behind taking out PHI cover is simple: each year, 1.8 million people are off work for six months or more, and the chances of this happening during your career are about one in six, according to medical experts.
About 600,000 people each year will be off work for more than 12 months.
Should this happen to you, there are few sources of income. One of them is your employer, who will probably offer some sort of sick-pay scheme, with a minimum of #57.70 a week Statutory Sick Pay (in the current tax year), payable for six months.
But few employers, even those who are prepared to pay more than the SSP minimum, will do so for more than a six-month period.
After that, you are on your own, unless your employer has taken out a group PHI policy, which usually kicks in at the end of an organisation’s ordinary sick-pay scheme.
If you are self-employed, however, there is only the state’s incapacity benefit to fall back on, and that is worth just #48.80 a week, rising to #57.70 after week 29 and then #64.70 after one year.
Which is where PHI comes in. Philippa Gee, managing director at Gee & Co, a Shrewsbury-based firm of fee-based financial planners, says: ‘We all tend to take a continuing income stream for granted. Yet the reality is that a significant minority will find themselves off work for quite a long time and will face financial difficulties. Should that happen, I believe this kind of policy can be tremendously useful in protecting not just the individual against the unexpected, but also his or her family.’
If you accept the need for PHI, the problem is three-fold. How do you obtain the best possible cover, with excellent service, at the least cost?
Ms Gee says: ‘There really is no way to do it other than to go to an independent financial adviser. This is not a product you can ever buy from an advert or through a salesperson. The terms can be completely different, prices will vary wildly and, ultimately, policies must be tailored round your needs to give the best possible value.’
When choosing a PHI policy, the starting point is to decide how much cover you need. Insurers will usually pay up to 75% of pre-tax earnings, including incapacity benefits, in order to prevent people feeling better off by staying away from work.
Beware of the danger of over-insuring: you may only need the cover to pay for essentials. And the longer you are prepared to wait before PHI kicks in, the cheaper premiums will be.
The cost of cover is dependent on a range of factors, including your job. The good news is that accountants are generally in the lowest risk category, while the highest are bricklayers and firefighters. Age, health, leisure activities and other habits, such as smoking or drinking, play a part. Gender is also an issue: women pay up to 50% more for cover because they claim more and for longer periods.
Probably one of the most important points is to pick a policy whose definition of inability to work covers your job, or at least a similar job for which you are qualified. If the policy only pays out if you cannot do any job, you may well find yourself stacking shelves in a supermarket instead of claiming PHI benefits.
For a list of IFAs near you, telephone 0117 971 1177.
Nic Cicutti is personal finance editor at the Independent
BEFORE YOU BUY A POLICY
– Decide how much you need to insure for
– Work out what your pre-tax earnings are, or the average of the last three years if your income fluctuates
– Find out how much you might receive from the state or your employer
– Decide how long you are prepared to wait before PHI kicks in
– Decide whether you want regular increases in the cover and payments (should a claim be made). This is usually a good idea: you may not make a claim for years after starting a policy.
If there is no index-linking, any payments may not reflect your real needs
– Ask if there is a premium waiver option so you do not pay premiums while the policy is paying you
– Make sure the policy does not specify the inability to carry out ‘any job’ before it pays out. Opt for ‘your job’ definitions
CUT THE COST OF COVER
– Accept a longer deferment period, such as six months
– Limit the cover you take out to essential spending
– Consider a budget policy, such as one limiting the amount of time a policy pays out for. Ranging available: between two and five years
HOW MUCH COVER?
Take this simple test:
1) Add up all your monthly expenses that you would need cover for
2) Multiply your pre-tax earnings by the insurers’ upper payment limit (say, 75%) and divide this figure by 12
If the figures for 1) and 2) are equal, you are not over-insured
If 1) is significantly less than 2) you may well be over-insuring
If 2) is significantly less than 1), you will face a shortfall between what you need and any PHI payment. Consider upping your cover.
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