Income Protection / Permanent Health Insurance (PHI)
When it comes to protecting your family, the most common thought would be to use life assurance. But what would happen if you suffered from a long period of illness ? The effects could be traumatic for yourself and your dependents.
The financial consequences for falling seriously ill for long periods or being involved in accident that leads to permanent disability would be traumatic enough, but if you were unable to work, how would you cope financially ? Do you have enough savings to maintain your current standard of living for the forseeable future ?
When long term illness strikes, it can often bring our income to a halt also. Continuing to pay your bills can become increasingly difficult as time goes on. The State safety net of statutory sick pay is now at a level that would provide a subsistence level of existence.
A PHI / Income Protection plan could replace up to 50-70% of your gross income needs. Income Protection plans will pay out a benefit after 4 weeks or 12, 26, or even 52 weeks of a valid claim, dependent on how the plan is set up. It will run from the deferral period to either the termination of the disability/illness or the death of the insured person, or the Plan expiry date which is usually 50, 55, 60 or 65 years old.
"IT WILL NEVER HAPPEN TO ME" Statistics for working people between the ages of 20-64 years indicate that the possibility of a long period of illness must be taken seriously. At 31 May 1997, over 1,700,000 men and women had been unable to work for more than six months and were claiming the Incapacity Benefit from the State. (Source: Govt
States Office quarterly summary of statistics May 1997).
TYPES OF INCOME PROTECTION PLANS Premiums for Income Protection Plans are usually paid monthly by direct debit or annually. Three standard types of cover are often offered.
- Level Cover: Benefits and contributions remain static throughout the term of the plan.
- Increasing Claim: Benefits increase at a 5% rate during the course of a claim, but premiums remain static (although these will be more expenive than level cover).
- Increasing Cover: Both benefits and contributions increase at a fixed rate (usually 5%) per annum.
The general insurance definition for Disability Benefit states that an Income Benefit will be paid to an individual if they are totally unable by reason of sickness or accident, to follow their normal employment. The benefit will commence at the end of the DEFERRED PERIOD and will continue until the earliest to occur, that is:
- Termination of the Period of Disability
- Death of the Insured person
- Plan expiry date
Cover is sometimes offered whilst overseas, but benefits will be restricted - although some policies can be maintained if you remain in areas such as the EU, North America or Australasia (i.e. countries with a comparable health and social security system to that of the UK). If you take a lower paid job after a period of illness, you may only be entitled to a portion of your Income Protection Benefit as the amount received would be based on the ratio of your drop in income to your original income. Medical benefits, for the purpose of rehabilitation are sometimes added as extras, but usually within very tight circumstances.
Whenever possible, taking out PHI along with Critical Illness cover and Life Assurance would provide the maximum level of protection against the effects of death or illness.
It could be possible that your employer provides you with some of these benefits as part of your employment package. Life Assurance (often known as Death-In-Service schemes), PHI and Medical Insurance plans are often provided at the employers cost, and employees are enrolled automatically. If you are unsure, it is worth finding out if any arrangements are in place. If one (or more) is in place, it is worth finding out exactly what is provided - as they could provide benefits anywhere on the spectrum from excellent to minimal; if the benefits are on the minimal side, it could be beneficial to supplement them with an additonal personal plan to cover any shortfall - just because an employers scheme is in place, it does not automatically mean that you would be provided with the level of cover that suits your personal needs.
If you wish to discuss the issue of protecting you or your family / partner / business against the serious consequences that illness or early death can bring along, we recommend that you seek independent financial advice.
NOTE: This document is intended to provide a brief overview of the subject. It should not be read as a recommendation to use any particular product, as it does not take into account individual circumstances and attitudes.