How would your family cope if you were unable to work? PHI could be the best way to protect your income if you fall ill.
ASK ANY financial adviser and they will tell you that the first priority for anyone with dependents should be to ensure they would have enough to survive on 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 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 700,000 people each year will be off work for more than a 12 months.

Should this happen to you, there are few sources of income. One of them is your employer, who will probably offer a sick-pay scheme, with a minimum of pounds 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, with the exception - ironically - of staff whose employers have taken out a group PHI policy, which usually kicks in at the end of the company's ordinary sick pay scheme.

If you are self-employed, there is only the state's incapacity benefit, and that's worth just pounds 48.80 a week, rising to pounds 57.70 after week 29 and then pounds 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 they will face significant 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 buy from an advert or through a salesperson. The terms can be completely different, prices will vary wildly, and ultimately, policies must tailored to your needs to give the best value."

When choosing a PHI policy, the starting point is to decide on how much cover you need. Insurers will usually pay up to 75 per cent of pre-tax earnings, including incapacity benefits.

Beware of the danger of over-insuring yourself: 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 (accountants are generally in the lowest risk category, while the highest are brickies and firefighters), age, health, leisure activities and other habits, such as smoking or drinking. Your sex is also an issue: women pay up to 50 per cent 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 in which you are currently employed, or at least a similar job for which you are qualified.

If the policy only pays out if you can't do any job at all, you may well find yourself stacking shelves in a supermarket instead of claiming your PHI benefits.

Before you buy

a policy

Make sure you know what your needs are:

n Decide how much you need to insure for.

n Work out what your pre-tax earnings are, or the average of the last three years if your income fluctuates.

n Find out how much you might receive from the state or your employer.

n How long are you prepared to wait before PHI kicks in?

n Do 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.

n Ask if there is a "premium waiver" option, so you don't pay premiums while the policy is paying you.

n Make sure the policy does not specify the inability to carry out "any job" before it pays out. Opt for "your job".