In the UK:
- A working adult is ten times more likely to be unable to work through ill health than die before retirement.
- There is a one in six chance of an adult being incapacitated for longer than six months.
- Almost two million people are sick or disabled and have been unable to work for over a year.
Long term illness is something we prefer not to think about, but many people suffer financial hardship as a result and the state offers only minimal help.
Eligibility for any state benefits is strict and minimum requirements with regard to earnings and working patterns have to be met and, even if claimants qualify, benefits are not generous, for example, current statutory sick pay allowance is £81.60 per week.
So, what are the options? Either take a chance, or consider permanent health insurance (PHI), also known as income replacement insurance, which may be the answer.
It pays a regular income designed to protect your standard of living if you suffer long term sickness or injury. Benefits usually starts after an initial waiting period of 4, 8, 13, 26 or 52 weeks and are payable until you return to work, die, or the policy expires, whichever happens first.
The benefit of this type of policy is the fact that the insurer may not cancel the plan or increase the premiums, no matter how often you claim for benefit and, as such, it is important to write the policy to a realistic retirement age (60 or 65, for example), so as to ensure you have cover for your entire working life.
Benefits generally amount to 60% to 70% of your income and are paid without deduction of tax. They are, however, very strictly based on your level of earnings and proof of these will be required if a claim is made, therefore, it is important not to exaggerate your income, as you may have paid for benefits you will not be entitled to.
Employers can arrange group schemes for their staff, which act as a valuable employee benefit as well as ensuring the liability for paying salaries, if staff are absent through illness, is restricted to a certain defined period, with the insurance policy taking over thereafter.
Usually for benefits to commence, you must demonstrate that you are unable to follow your usual occupation as a result of sickness or accident. Insurance companies have different definitions as to what constitutes long term illness, but you can be fairly confident that it is not enough just to feel a little bit poorly.
If you suffer a disability or illness that enables you to return to work but only on reduced earnings, maybe as a result of going part time or taking a lower paid job, your insurance company will probably pay you a reduced benefit. This will be enough to make you financially better off working than staying off sick, but less well off than working full time, as your normal job.
So how much does it cost?
There are a number of factors which influence the size of premium you pay:
Occupation – Most insurance companies have four classes of occupation, which are graded accordingly. Class 1 includes the lowest risk professions, such as administrative or professional roles, as these represent the lowest risk to the insurance company. By contrast, Class 4 occupations, such as builders or heavy labourers, carry the highest premiums due to the much greater risk of injury involved in their occupation.
It is vitally important that you inform your insurance company if you change occupations, as failure to do this could invalidate any future claim for benefit.
Health – Naturally, any insurance company will want to know about your medical history before offering terms, and any previous complaints or injuries may affect the premium or mean exclusions to the standard policy terms. Non-smokers will also pay less.
Waiting period – If you select a longer initial waiting period before benefits become due, it will mean lower premiums. A policy with a 26 waiting period will typically charge lower premiums than one with a 4 week wait, because the insurance company’s costs will be lower. It is important, however, to set a waiting period that is realistic and one that means you will not suffer financial hardship, should you be unable to work through accident or illness.
Payment period – How long do you want the policy to pay benefits? The shorter the payment period, the cheaper the premium, but remember to make sure the policy term is realistic for your retirement plans.
Gender – Not that there is a lot you can do about it, but statistics show that on average more women are likely to suffer ill health than men during their working lives. Consequently, premiums are higher for a woman than for a man of the same age and occupation.
Why consider protecting your income?
PHI should form an essential element when arranging your financial planning affairs, whether that be on an individual basis, or as an employer for your workforce.
The ramifications of not having such cover for an individual are clearly evident, however, when considering the business environment, the need is equally present, in some instances greater.
Generally within such a structure, each party has their specialisms, which are key to the success of the business and the profitability therein.
If one of these parties could not work, then not only would it affect their income, but also the income of the business if it had to support the individual financially during a period of ill health.
By effecting a PHI policy, these worries are taken away, providing peace of mind for the individual and less financial pressure on the business.
The vast majority of us are concerned to protect our mortgages and families in the event of death, however, many people overlook the results of long term illness. To protect and guard against this through a permanent health insurance policy is something that should feature more heavily in people’s financial planning arrangements.