How to guard your income against illness

HEALTH INSURANCE SURVEY: gain more protection and you don't have to pay the earth, is the claim. We examine the range of different policies avai lable, from sick pay cover to insurance for the costs of going into a nursing h ome

Between age 30 and retirement, death rates in Britain are very low and most deaths are because of accidents. Yet during this time one in four of the population is likely to suffer from a serious illness or accident.

While most of us have life insurance policies, often thought of in terms of paying off a mortgage, not many consider protecting income in case they cannot continue working.

But relying on the state is not enough. Invalidity benefits are severely restricted and can be as low as pounds 54.55 a week, compared with average household bills, including mortgage repayments, of pounds 283 a week. Insurance policies that will cover mortgage repayments for a year or two if redundancy or illness strike are growing in popularity. But there is much more you can do.

For example, you can take out "waiver of premium" cover for your life assurance or pension policies. Usually costing around 1 per cent of the premium, this will pay the premiums until maturity if you suffer from a long-term illness that prevents you earning any income. Luckily, most illnesses do not keep people off work for long, and employers usually continue to pay salaries for a while. For more serious cases, many good employers have a permanent health insurance (PHI) scheme to cover their workforce. This ensures that after a given period, usually three or six months, payment is made of up to two-thirds of salary if an individual remains unfit for work.

But such arrangements are still a minority, so for most of us it is a matter of shopping around. There are two types of insurance that will maintain your standard of living if you cannot work because of a medical condition: permanent health insurance (PHI), otherwise known as income protection, and critical illness cover (CIC). While superficially similar, they offer different protection and neither covers serious pre-existing medical problems.

There are around 50 PHI plans providing protection, usually to age 60 or 65. They will all pay out a monthly amount if the policyholder is unable to continue working after a specified period because of illness or accident. Most long-term incapacity is covered, including ME, mental problems through stress and muscular conditions such as severe back pain.

Premiums are determined by age, sex (females pay more than males as they are more likely to suffer from long-term medical problems) and whether benefits are paid at a flat rate or rise with inflation. The overriding factor determining the premium, however, is the deferment period. If payment is to commence after a month, expect to pay a lot more than if it is to start after six months.

There is a wide variation in premiums and an independent financial adviser will be able to provide a list of best buys.

A male non-smoker of 40 who wishes to receive flat-rate benefits of pounds 1,000 a month payable after one month of incapacity until 60 can expect to pay premiums of around pounds 40 a month. If the benefits become payable after six months, then expect premiums of pounds 15 to pounds 20 a month. A woman of the same age can expect to pay at least half as much again.

PHI policies pay out whenever an individual cannot perform his or her normal employment. Some, however, will pay out only a proportion of the benefit if a client can do some less remunerative job.

With critical illness policies, payment is made after a confirmed diagnosis of one of a number of specified conditions. It is not conditional on being unable to continue working. Most benefits are payable as lump sums, although a few will pay out a monthly income.

CIC premiums vary. Age and sex of the applicant are taken into consideration as well as the range of conditions covered. Unlike PHI, women pay less than men at the same age.

A male non-smoker of 40 buying a stand-alone "whole-of-life" plan to provide a pounds 100,000 assured sum can expect to pay between pounds 70 and pounds 80 a month. A female wanting the same cover can expect to pay about pounds 5 to pounds 20 less each month.

If you are thinking about protecting yourself and your family, both CIC and PHI should be considered. They provide benefits at least as important as life assurance and pay out when a serious medical problem has been diagnosed.