Money: In the black, if not in the pink
The bills don't stop coming when you're ill. Virginia Wallis suggests a cure
Sunday 24 May 1998
The insurers would like us to think about this. A lot of the marketing for critical illness insurance, which pays a lump sum if you are diagnosed with cancer or survive a heart attack or stroke, plays on our natural fear of cancer and other illnesses.
It is easy to get sidetracked by the scary "what-if" tone of much of the promotional material for this kind of insurance. The thing to focus on is not the seriousness of the illness but the financial consequences of being too ill to earn as a result of any illness, including relatively trivial things like broken bones. You should also resist the lure of the lump sum if what you want is replacement earnings. Having a large lump sum that could be used to pay off your mortgage may sound like a good idea, but only if you would still have enough money coming in to cover your other expenses.
You can get a regular income from the confusingly-named permanent health insurance (PHI) although it is increasingly called income replacement insurance. If you cannot work because of illness or injury, income protection pays out a monthly income until you are fit to work again or retire.
Before you consider taking out any private insurance, think about what you have in place already to help you if you had to stop work as a result of illness or long-term disability. If you are self-employed, the answer ought to be a private insurance scheme and you should have done something about it.
If you are an employee, your employer may run a decent sick-pay scheme. If you belong to a pension scheme (or have a personal pension) check whether it will pay you a reasonable income if ill health forces you to give up work altogether.
Without these cushions, you are looking at the possibility that a period of sickness could see your income falling to around pounds 200 a month after tax in the form either of Statutory Sick Pay (SSP) from your employer or incapacity benefit from the state.
If you don't think you could manage on SSP or state benefits and you don't want to take the risk that you'll have to, you need to arrange your own protection against loss of income by buying insurance.
So why do more people buy a lump-sum critical illness deal than arrange insurance that will replace their income? It could be that people buy critical illness insurance in the mistaken belief that it is a direct substitute for income replacement, as Roger Capham, Business Manager for Norwich Union Healthcare, points out. "Traditionally, people seeking cover against disability have chosen either an income protection or a critical illness policy, as the common perception is that they are similar products. In fact, the cover and benefits provided are very different."
Another reason could be cost. At face value critical illness insurance costs less than income replacement: at Norwich Union, a non-smoking man aged 30 would pay pounds 57.15 a month for a policy that paid a replacement monthly income of pounds 1,500, but pounds 42.52 for a critical illness policy that paid out a lump sum of pounds 90,000 (the size of lump sum you would need to pay an equivalent income for five years). The same figures for a non-smoking 30-year-old woman are pounds 95.05 for income replacement and pounds 36.57 for critical illness.
However, the figures assume that the income replacement policy would start to pay out after you had been ill for a month. If you were prepared to wait six months before it starts to pay out, the cost comes down to pounds 26.85 for the man and pounds 43.55 for the woman. Income replacement costs more for women as they are more likely to claim and claim for longer.
But it is worth bearing in mind that you may pay less for critical illness insurance because you get less in terms of what is covered, and it is less likely that the policy will have to pay out. The test for a payout under an income replacement policy is whether you are medically unfit for work, so most illnesses, including stress and back pain, are covered.
With critical illness insurance, you have to suffer one of the specific conditions listed in the policy or have become totally and permanently disabled - the test for which is usually pretty stringent. In addition, a replacement income carries on being paid as long as you need it to be paid, including part payments to top up your earnings if you go back to work on a reduced salary. There is also no limit on the number of claims you can make (provided you are still paying the premiums and provided that the claims are valid). Once you have spent the lump sum from a critical illness policy, you do not get any more.
q Virginia Wallis is the author of the 'Which? Guide to Insurance' to be published by Which? Ltd in June (price pounds 10.99). To order a copy, call the free credit card hotline on 0800 252100.
We have five free copies to give away to IoS readers. Send a card marked Which? Offer to the personal finance editor, 'Independent on Sunday', 1 Canada Square, London E14 5DL. The closing date for the draw is 1 June.
Spot the difference between sickness insurance policies
Income replacement (permanent health insurance, PHI) Critical illness insurance
Type of payout Type of payout
Tax-free monthly income. Tax-free lump sum.
Test for valid claim Test for valid claim
Medically unfit for work. The best policies define this as "incapable Diagnosis of one of specified list of "life-threatening" conditions,
of doing your own job". Less generous policies define it as "unable to typically cancer, stroke, heart attack, coronary bypass, surgery,
undertake any sort of paid employment". Some policies also cover kidney failure, major organ transplant.
total and permanent disability (TPD).
What is not covered? What is not covered?
Claims arising from self-inflicted injury, alcohol or drug abuse, As PHI plus illnesses not specifically covered by the policy, death
pregnancy and childbirth, HIV- and Aids-related illnesses, war risks. before the deferred period (see below) is over.
When does the policy pay out? When does the policy pay out?
After the "deferred period" agreed when you take out the policy, Once you have survived the deferred period, which is typically one
which can be after you have been ill for four, eight, 13, 26, 52 or 104 month from the diagnosis; six months (or longer) for TPD claim.
weeks. The longer the deferred period, the cheaper the premium.
When does the policy stop paying out? When does the policy stop paying out?
When you return to good health, reach retirement age or when the Some policies pay out for a maximum of five years but these are
policy comes to an end; whichever comes first. best avoided after the lump sum has been paid out.
Is there a limit on the number of claims I can make? Is there a limit on the number of claims I can make?
How much can I insure for? How much can I insure for?
Typically 60 to 65 per cent of your before-tax salary or taxable The maximum lump sum you can insure for varies from policy
profits if you are self-employed. Housepersons can be insured for to policy, but pounds 500,000 or pounds 1m are common.
an assumed income of pounds 10,000. You don't have to insure for the
What affects the cost? What affects the cost?
Your age, sex, occupation, income, deferred period, age to which Your age, sex, occupation, medical history, smoking habits, leisure
income will be paid, current state of health, smoking habits, pursuits, length of time you want to be covered for - either until
leisure pursuits. you die or for a fixed number of years.
Will premiums go up during the life of the policy? Will premiums go up during the life of the policy?
Yes, but the increase has to apply to all policyholders: the insurer Yes - typically when premiums are reviewed every five to 10 years,
cannot weight what you pay because you have made a claim. unless the insurer guarantees not to put your premiums up during the term of your cover.
27 March 2015 08:30 PM
27 March 2015 08:30 PM
20 March 2015 07:30 PM
How to make the most of Isas: You can save more money now, the returns are tax-free and the rules are flexible
20 March 2015 07:30 PM
13 March 2015 09:00 PM
13 March 2015 09:00 PM
10 March 2015 09:03 AM
The Financial Conduct Authority found non-compliance in all reviewed firms
11 March 2015 11:38 AM
Pension expert John Lawson talks on why improved longevity is something to plan for carefully
06 March 2015 08:30 PM
02 March 2015 10:50 AM
The DWP and the FCA have joined forces to investigate transaction charges in occupational pension schemes
04 March 2015 03:00 PM
The company was found to have unacceptably long call waiting times
27 February 2015 07:30 PM
27 February 2015 07:30 PM
27 February 2015 12:01 AM
The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter
- 1 Tidal launch: The most pretentious lines from Alicia Keys' valedictory speech
- 2 Britain First 'acting like Ukip henchmen' by invading meeting of activists in revenge for pub protest against Nigel Farage
- 3 Katie Hopkins attacked me on Twitter — so I reported her to the police for inciting racial hatred
- 4 Tidal: Jay Z's Spotify rival streaming service criticised for making wealthy artists even richer
- 5 Brixton squat flats now costing up to £3k per month show how out of control rent is in London
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
Street preacher quoting from the Bible fined for calling homosexuality an 'abomination'
Woman filmed launching racist tirade against men on the Tube for speaking in 'own lingo'
The West has it totally wrong on Lee Kuan Yew
David Cameron calls Labour 'hopeless, sneering socialists' while announcing 7-day NHS plans
Revealed: Putin's army of pro-Kremlin bloggers
iJobs Money & Business
£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...
£45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...
Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...
Day In a Page
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000