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.
28 May 2015 12:10 AM
The PPI scandal has already cost Britain’s banks around £24 billion
15 May 2015 08:30 PM
08 May 2015 10:30 PM
13 May 2015 07:34 AM
The Tories have appointed campaigner Ros Altmann to the post
30 April 2015 07:30 PM
06 May 2015 09:39 AM
One reader’s monthly direct debit charge has been increased by 62 per cent
05 May 2015 02:09 PM
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
24 April 2015 07:30 PM
01 May 2015 12:00 AM
More than £60m was paid out to more than 2 million prizewinners this month
28 April 2015 05:20 PM
Why can’t we just have open and honest charges, without all the cross-subsiding?
28 April 2015 03:50 PM
With the pound at a high against the euro, it pays to buy now before uncertainty post-election
17 April 2015 06:00 PM
23 April 2015 12:00 AM
Experts disagree about the 7% increase over the past year
22 April 2015 07:29 AM
Too many mortgages are being sold with misleading gimmicks
21 April 2015 09:54 AM
The firm’s revenues slumped by a third to £217 million in 2014
Buyers beware of new-build home headaches
Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help
Is it really that bad in the bond market?
Five Questions On: GB Energy's new tariff
Money roundup video: Warning for mortgage borrowers and Premium Bonds boost
- 1 10 ways we damage our teeth – without realising
- 2 There is something wrong but very right about this Bible illustration
- 3 iPhone 'effective power' text: how to be safe from iOS bug that lets people crash your phone
- 4 Photo of wedding guest proposing to girlfriend in front of bride and groom goes viral
- 5 Charlie Charlie Challenge explained: it's just gravity — not a Mexican demon being summoned
EU referendum: David Cameron's rules are a 'democratic disgrace', says French-born Scottish politician set to be denied a vote
British tourists complain that impoverished boat migrants are making holidays 'awkward' in Kos
SNP fury as HS2 finds 'no business case' for taking fast train service to Scotland
Australian man punched in the face for defending Muslim women from abuse on train
A nation of inequality: How the UK is failing to feed its most vulnerable people
David Starkey 'tells Amal Clooney to shut up and stop over-promoting human rights'
iJobs Money & Business
£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...
£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...
£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...
£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...
Day In a Page
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
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