Earn while you're ill

Simon Read on how to cover yourself against loss of earnings

If you fall ill and are unable to work, how will you pay your bills? Do you expect that your company will help you out? Or are you planning to rely on state benefits?

These days you have to make your own arrangements for protecting your income in case of disability or serious illness. You can do so through permanent health insurance (PHI), also known as income protection. It's a relatively cheap way of giving yourself peace of mind, and has become increasingly important against a background of gradual reductions in state benefits.

Under the present regulations, a married 30-year-old man earning pounds 20,000 would only qualify for Incapacity Benefit of up to a third of his take- home pay - implying a massive reduction in living standards. If you're self-employed, PHI is even more crucial, as you won't even have the cushion of some help from an employer.

To buy an income replacement of pounds 500 a month would cost a 30-year-old man pounds 14.79 a month through Sun Alliance. That is based on a three-month waiting period; if you agree to wait six months before payments start, the cost of the insurance falls to pounds 11.96. For income replacement of pounds 1,000 a month, double the monthly premiums.

There are a wide variety of PHI policies on the market and the wise buyer will study more than one before signing up. All the big insurers offer them, including Abbey Life, Allied Dunbar, Eagle Star, Friends Provident, General Accident, Legal & General, Norwich Union, Sun Alliance, and so on.

PHI income is generally limited to 75 per cent of pre-tax earnings but you should work out how much cash you'll need balanced against the cover you can afford. Then think about the waiting period; how long will you be paid by your employer?

You may want to consider "own occupation" policies. Some claimants have been caught out when they are unable to return to their own job, but are declared fit by their doctor for other types of work. Suppose that after your illness you cannot return to your previous highly paid occupation and have to take up lower-paid work. You might end up earning less than you were being paid by the insurer when you were sick. An own occupation plan will continue to pay until you can return to your own profession or until retirement. The plans are a little more expensive, but you may think it worthwhile.

You don't have to be in work to start a PHI policy. Parents and other carers can also experience financial hardship if they fall ill. Norwich Union Healthcare, for example, charges pounds 9.70 a month for benefit of pounds 833 per month for a 30-year-old housewife. Insurers will let you buy insurance for up to pounds 10,000 a year for this type of cover

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