Cost of illness cover rises: Mounting claims have produced big premium hikes. Paul Gosling reports

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The Independent Online
PREMIUMS are rising sharply for insurance that provides long-term benefits during illness or disability. Teachers and dentists are among the hardest hit, because some insurers now see them as a greater risk.

The premium hikes come as many are considering taking out this type of cover, known as permanent health insurance (PHI), because of fears over the future of state benefits.

Insurers blame the recession for pushing more people into long- term illness, and encouraging early, health-related, retirement.

Occupation is a prime factor influencing premiums, and teachers and dentists have just been re-rated as a greater risk by several insurers because of worsening claims experiences. Insurers believe both professions are falling prey to stress-related illness due to changes in their working practices.

A typical General Accident policy for a male head teacher, for which the premium was previously pounds 28 a month, would now cost pounds 37.35. These premiums are based on a policy that would start paying a benefit after 13 weeks. The premium for a typical Zurich Life policy for a dentist has risen from pounds 15.29 to pounds 28.35 a month.

Friends Provident, which has been in the market for 100 years, last month increased premiums by 20 per cent for new policies, while Unum increased its by just under 10 per cent in April.

Norwich Union also increased premiums in April, typically by about 10 per cent, while moving from guaranteed to reviewable premiums and substantially revising the product offered.

Sun Alliance raised its premiums by about 15 per cent last September.

Other insurers have followed suit, although recent entrants to the market have avoided increases by setting premiums at a higher level when launching policies.

Tunbridge Wells Friendly Society provides an investment-linked policy, which pays a bonus on retirement that is unaffected by the insured's claim levels.

While the society has not raised its base premium, it did severely increase the loading last month for categories with the worst claims experience. The loading on the class 4 category - heavy manual workers - has increased by 200 per cent, making some policies more than twice as expensive as before.

A typical class 4 policy will now cost pounds 116 a month, compared with pounds 53 previously. Tunbridge Wells has also introduced a 20 per cent loading for smokers on new policies and reduced the payable benefit for those earning more than pounds 40,000.

Reinsurers, who provide back- up cover for insurance companies, have been pushing for a move from guaranteed to reviewable premiums, which can be increased according to the level of claims.

Sun Alliance and Friends Provident are believed to be the only leading providers still offering guaranteed premiums. Both offer policies on which premiums and benefits remain level.

Alternatively, the insured can anticipate inflation by opting for a dynamic policy, where both premium and benefit increase by 5 per cent a year in the case of Friends, or 5 or 7.5 per cent with Sun Alliance.

Women may have to pay as much as 50 per cent more than men for PHI, which insurers justify on the grounds of claims experience. Insuring against being unable to return to normal occupation is more expensive than cover that only pays out if someone cannot work at all.

People buying PHI need to be aware that it is not necessarily a cure-all for financial troubles during illness. Some policies are suspended if the policyholder works abroad, and many review premiums if the person changes occupation. Opting for an extended deferment - the period between the onset of illness and the time a benefit is collected - will reduce premiums.

All the leading insurers exclude Aids-related illnesses from cover, and some suspend the policy, even for accident cover, as soon as the person is diagnosed as HIV positive.

Many policies also exclude maternity-related conditions.

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