The Government's decision to replace the Invalidity Benefit scheme with the new, and much tougher rules for Incapacity Benefit is likely to encourage people to take out their own insurance protection against long-term illness or disability.

Insurers certainly hope so: in an industry where pushy sales staff are regularly accused of selling unnecessary policies to their clients, this sort of insurance cover seems remarkably undersold.

Perhaps the name doesn't help. Policies which offer to replace lost earnings during time off work for illness have traditionally been described by insurers as Permanent Health Insurance or PHI, though this sort of cover has nothing to do with private medical health insurance.

Recent years have seen some companies rebadge their PHI products with a new name, Income Protection Policies. So far, however, the public seems unconvinced. Sales of PHI policies have actually fallen in the past few years, down to about 125,000 new policy starts last year. In total, about 1.2 million people have PHI cover.

The rising cost of PHI has not helped. Most insurers offering PHI have increased premiums substantially over the past few years, and more insidiously many companies have introduced the right to review premium levels during the life of a policy.

Friends Provident and Sun Alliance are the two major players in the market who are still prepared to guarantee premium rates for the life of a PHI contract which, since most policies run until retirement, may be many years.

Kate Walker of insurance brokers Tolson Messenger, says: "PHI is certainly undersold, and I think it's incredibly valuable." The cost of cover may seem expensive, she says, but insurers are taking on a risk which, in cases of disability or chronic illness, could involve many years of continuous claim payments.

"From the insurer's point of view, the potential liability is huge. You've only got to think of things like RSI [repetitive strain injury] and stress- related illnesses to realise the underwriting difficulties involved."

Premiums are set according to the individual's occupation (there are four standard categories used), with insurers typically very wary of insuring people involved in accident-prone manual work. Other factors - such as the amount of driving done for business - may also be enough to load the premium or to move an individual from a lower to a higher-risk occupational group. Insurers also take a keen interest in the health of their potential policy-holders.

Allan Evans, marketing manager with Friends Provident, observes: "Yes, PHI is more complex to underwrite than term assurance. Underwriters may stick a loading on a premium, or not offer cover at all."

Women are at a further disadvantage. A 34-year-old non-smoking man in a low-risk occupation looking for a PHI policy to provide him with £200 a week in replacement income would find premiums starting at about £18 per month, if he was prepared to select a policy with a 13-week waiting period. For identical cover, women would be expected to pay more than £25.

"Women can be greatly disadvantaged, because of the so-called "morbidity factor" - they are deemed to be prone to take more time off work," says Mike Hall, director of independent advisers Miers Ltd.

On devising a PHI, Kate Walker recommends: "The first obvious thing is for people to work out the basic minimum income they need to live on."

PHI policies do not undertake to fully replace lost income, and the maximum insurable sum is normally fixed at 75 per cent of average monthly earnings (with a further reduction to allow for state benefits or employer's sick pay provisions). All insurers want to be confident that their policy- holders have an incentive for returning to work.

The second decision to take is the length of the deferment period. Typically, you can choose a policy which cuts in to pay claims after a period off work of four weeks, 13 weeks, 26 weeks or a year. The longer the deferment, the lower the premiums charged. In general, employees with separate company provision for sickness may be better able to withstand longer deferment periods than the self-employed.

The actual grounds for claims also need consideration. As Kate Walker points out, some insurers decline to pay out if their policy-holders are able to undertake work, even if this is not their usual occupation.

"Our advice is to choose a policy which pays if you are unable to undertake your own occupation," she says.

While policy holders are free to cancel their PHI contracts at any time, it is better to view PHI as a long-term commitment, if only because taking out a new policy later in life involves higher premiums. There may also be further medical conditions to be taken into account.

For this reason, a PHI contract should be as flexible as possible, allowing breaks for periods of unemployment or childcare responsibilities.

It also suggests arranging the oppor- tunity to increase income protection levels, as earnings grow. This can usually be arranged. However the right to increase cover beyond simple inflation-proofing involves potentially greater risk for the insurer and usually costs extra.

Friends Provident, for example, allows its policy-holders to increase their cover by up to 30 per cent every three years for the first fifteen years of the policy. In exchange, the premium is increased by 20 per cent.

Typical costs for cover

PHI specimen quotations for

someone 35 next birthday, a non-smoker, employed in low-risk (class 1) occupation with 13 weeks

deferred period to pay £200pw

benefit, with cover until aged 65

Company Male Female

(premium per month)

Unum £17.85 £25.76

Zurich Life £18.69 £26.58

Norwich Union £21.79 £31.19

Friends Prov £25.80 £37.20

Permanent Ins £20.12 £33.77

Sun Alliance £28.18 £41.02

Table compiled by Tolson Messenger (0181-741-8361)