Illness cover costs down

Clifford German on PHI changes

Anyone who has a permanent health insurance policy (to provide an income to policyholders who are too ill to work) which was taken out before last April should check they are not being charged too much premium.

With effect from April, all benefits on individual policies are being paid free of tax until the policyholder returns to work, so the amount of cover now required for a given level of benefit is less than it was when the proceeds were taxable, and many policy-holders still paying the old rate may well be paying too much for cover they do not need.

According to Midland Bank, up to a million people with PHI cover may be paying an average of pounds 25 a year too much for cover which, under the new rules, would also exceed the ceiling which PHI providers want to pay.

Most providers would originally cover a maximum of 70-75 per cent of gross income prior to the claim, less any state benefits which may be payable, so that policyholders do actually have an incentive to go back to work if they can.

Now the benefits are tax-free the entitlement could well exceed these thresholds and some long-standing policyholders could be better off not working. But the majority who want to work might think they are now paying too much.

Midland is not planning to renegotiate existing policies, but it is reducing the cover it offers on new policies to keep the actual benefits payable net to roughly the old gross levels. It is scaling down the premiums accordingly.

It is also writing to its established PHI policy-holders suggesting they could reduce the level of cover they pay for from 75 per cent to 50 per cent of current gross income, and offering to refund the excess premiums paid since April.

Reducing the premiums will save the average policy-holder about pounds 5 a month or pounds 1,800 over the lifetime of a 30-year policy.

Nick Lomas, the spokesman for UNUM, based in Dorking and one of the big providers of PHI insurance, says it has reduced its cover for new policies from 75 per cent of gross income to a flat 50 per cent of gross salary, and has contacted independent financial advisers through whom most of its policies are sold, suggesting they review the level of clients' cover at their next assessment.

But UNUM believes that many policyholders have substantially less than the recommended level of cover and should allow their benefits to rise rather than reduce their premiums.

Norwich Union, which now sets a ceiling on cover of 60 per cent of income but disregards any state benefit when calculating the pay-outs, has also asked financial advisers, who are responsible for selling 85-90 per cent of its policies, to draw the attention of policyholders to the fact they could be over-insuring.

But providers are unanimous in saying that only around 10 per cent of working people in the UK have PHI cover, and this is far too few in the light of the reduced levels of state benefit now available to people who cannot work because of illness or injury.