Money: In the black, if not in the pink

The bills don't stop coming when you're ill. Virginia Wallis suggests a cure

THIS WEEKEND marked World Cancer Day, a chance to help towards reducing the physical and emotional cost of cancer. But not many of us have the foresight to follow that through and consider how we would cope financially if we had to give up work because of illness.

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?

No. Yes.

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.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
PPI complaints were down by about a half

Banks face fresh wave of PPI compensation claims after landmark ruling

The PPI scandal has already cost Britain’s banks around £24 billion

Some experts warn that the bond sell-off may continue until the autumn, when the US Federal Reserve is expected to lift interest rates

Is it really that bad in the bond market?

The great sell-off has sparked fears for our pensions as well as bonds. Simon Read asks if you should keep calm or panic
Up and away: rates will rise but your mortgage won't escape its moorings with a long-term fix

Is a 10 year mortgage deal a fix too far?

A cut-price deal for a decade-long home loan - where's the problem? Only, says Simon Read, that circumstances can change and it won't be easy to get out
In a surprise move the Tories have decided against putting a career politician into the job. Instead they’ve handed the responsibility to campaigner Ros Altmann

New pensions minister has massive job on her hands

The Tories have appointed campaigner Ros Altmann to the post

Promises, promises: David Cameron talks to staff at Asda's head office in Leeds today

General Election 2015: How you vote next week could affect your finances

Rival party pledges could shrink your savings or grow your nest egg
Logos for the 'Big Six'; energy companies (top row from left) British Gas, EDF, RWE npower, (bottom row from left) SSE, E.ON and ScottishPower

Winter heating underpayment brings summer pain

One reader’s monthly direct debit charge has been increased by 62 per cent

Almost 15,000 people died last winter through living in cold homes that they couldn’t afford to heat

Social tenants locked into energy tariff for 40 years

Many Londoners who live in social housing estates are not allowed to switch because their landlord has ‘locked’ them in to buying from one supplier

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Day In a Page

    Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

    The 161-page dossier that exposes Fifa's dark heart

    How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
    Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

    Exclusive interview with Tripoli PM Khalifa al-Ghweil

    'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
    Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

    Raymond Chandler's Los Angeles

    How the author foretold the Californian water crisis
    Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

    Art attack

    Chinese artist who posted funny image of President Xi Jinping facing five years in prison
    Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

    Cher is the new face of Marc Jacobs

    Alexander Fury explains why designers are turning to august stars to front their lines
    Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

    'I'm climbing Ben Nevis for my daughter'

    Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
    10 best wedding gift ideas

    It's that time of year again... 10 best wedding gift ideas

    Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
    Paul Scholes column: With the Premier League over for another year, here are my end of season awards

    Paul Scholes column

    With the Premier League over for another year, here are my end of season awards
    Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

    Liverpool have seen too much tragedy to forget Heysel

    Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
    Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

    Khan’s audition for Mayweather may turn into a no-win situation

    The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
    Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

    Blundering Blair quits as Middle East peace envoy – only Israel will miss him

    For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
    Fifa corruption arrests: All hail the Feds for riding to football's rescue

    Fifa corruption arrests

    All hail the Feds for riding to football's rescue, says Ian Herbert
    Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

    The Kurdish enclave still resisting the tyranny of Assad and Isis

    In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
    How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

    How I survived Cambodia's Killing Fields

    Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
    Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

    How Stephen Mangan got his range

    Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor