Workers left at risk by employers' cuts to liability cover

Chiara Cavaglieri reports on how you can protect your finances against ill health or accident

More than half a million workers are at risk because insurance ignorance is rife in British businesses and employers are looking to cut corners to reduce costs in the recession, according to new research from AXA Insurance.

Although it is a legal requirement to have employers' liability insurance in place in case an employee has an accident at work, AXA found only one-third of businesses are aware of this obligation. Even more worryingly, many businesses that do have insurance in place say they are looking to reduce or even cut out their cover altogether.

"Most people wrongly assume that they will have an adequate amount of financial protection from their employer or the Government. In reality, their actual standard of living will go out of the window if they rely on these benefits," says Matt Morris, a policy adviser at independent financial adviser LifeSearch.

With employees unable to rely on their employers or the state, many are turning to critical illness cover or income protection. With critical illness cover, the insurer pays out a tax-free sum on diagnosis of life-threatening conditions, which must be specified in the policy. It can usually be added to a life insurance policy relatively cheaply. A non-smoking, 30-year-old male, for example, can take out £120,000 of cover over 25 years with monthly premiums of £29.58 with Royal Liver. Cover is typically set to remain static throughout the term or decrease over time.

Critical illness cover has come in for heavy criticism for using complex medical definitions to decide which conditions are excluded or included. As an example, many policies exclude non-invasive early stage cancer, which means that in some instances, policyholders will not be able to claim even if a lumpectomy or mastectomy is required. Other insurers, including PruProtect and Axa, use a severity scale to determine the level of payout, which could be anything from 10 per cent to the full amount of the sum assured, depending on how serious the illness is.

Critical illness policies also exclude stress and back pain from their policies – two of the biggest causes of absence from work. With this in mind, many people will be better off with income protection insurance. Instead of paying out for a specific illness, income protection insurance provides monthly payments if you are unable to work.

"Everybody should have income protection. It's the most undersold product in our industry and actually a really straightforward product," says Emma Walker, the head of protection at price comparison site

When deciding on the level of cover, you should calculate the benefits you're entitled to from the state and your employer. This will help when it comes to setting the deferment period of your policy, which determines how long after falling ill the policy will kick in. If you opt for a longer deferment period, you can usually lower premiums considerably but run the risk of not having cover in place quickly enough. You will also have to decide on the premium type, whether to opt for guaranteed or reviewable premiums. Generally, guaranteed premiums are a safer bet as reviewable rates can start off cheaper then rocket in the future, particularly if you make a claim.

Gender, age and occupation will affect the premium level considerably. As an example, a 30-year-old male office manager, non-smoker, looking to protect an income of £1,200 a month over 25 years, with a three-month deferred period, would pay monthly premiums of £15.12 with Pioneer.

Watch out for the wording of any policy you take out. Some income protection policies cover you only if you are unable to do your current job, labelled "own occupation", while "suited occupation" covers an inability to any similar job, and some policies cover you only if you are unable to perform any job, known as "any occupation". The last is the least advised purchase as you can make a claim only if you are unable to perform any job and is therefore less likely to pay out.

One of the biggest benefits of income protection is that it will provide you with money until you either recover or retire. While a lump sum may be better if your recovery is relatively quick, having the assurance of guaranteed income until you're well again is usually preferable. An adviser can help to tailor a policy to suit your needs and always review it every couple of years, as your circumstances can change. It may also be useful to index link the sum assured so that it increases with inflation. This will mean your premiums increase over time too, but you will be safe in the knowledge that you have the right level of cover throughout the term of the policy.

"Always go for the best policy you can afford and one that's not just suitable for today but will stand the test of time," says Ms Walker.

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