Ill-health cover can cure cash sickness

THE REPLACEMENT of state sickness invalidity benefits by incapacity benefit last month has thrown into sharp relief the issue of financial self-protection against ill-health.

Experts are united in predicting that the new benefit will be much more stringently applied for people who become sick.

For millions, this raises for the first time the question whether it is worth taking out permanent health insurance (PHI), which replaces income lost during extended illness.

At present, only 12 per cent of the working population has PHI cover, either with an individual policy or through a company scheme. A survey of PHI policies shows, however, that often those in most need - the self- employed and people in riskier occupations - are the least likely to have this cover.

The survey, by Planned Savings, a financial monthly, says this is largely because of the public's view that PHI costs too much. To some extent, these perceptions are right - premiums are high, chiefly because of the high chance that people may claim.

Department of Social Security figures show that in 1993 more than 750,000 people had been unable to work for three years or more through ill-health. About 470,000 had been off work for between one and three years, and 180,000 were off sick for between six months and a year. Research by Unum, a specialist PHI provider, shows one in five working people has a chance of being away from work for three months or more.

Holden Meehan, an independent financial adviser in London, has published a free factsheet defining PHI and giving advice on selecting the right plan for specific conditions, including Aids.

Amanda Davidson, an adviser at Holden Meehan, said: "There are companies that operate different policy exclusions, have different premiums and pay varying levels of benefit. Plumping for a well-known name is not always best."

The Planned Savings report offers information aimed at helping people to choose from the different types of cover.

One way of reducing costs is to opt for more limited cover. Instead of having benefits paid until the age of 60, a claim period of two, three or five years can be chosen.

Unum's policy offers this option. Premiums for a 30-year-old non-smoker receiving £12,000 in benefits after 26 weeks cost £11.13 a month if benefits are paid until 60, £7.88 if paid for five years, and £6.30 for benefits paid over three years. Taking cover for less than is earned is another way of cutting premiums.

For some potential policyholders the possibility of linking PHI to long- term care insurance can be important, especially if the illness is a disabling one and likely to last beyond retirement. BUPA's contract, for example, does not stop at retirement.

One problem likely to affect the cost of PHI, however, is that many policies pay out on the basis of an income in addition to any state benefits received, up to a percentage figure agreed with the provider.

The Government's decision to reduce benefits will therefore force up premiums as insurers try to bridge the gap.

Self-employed people, who do not receive statutory sick pay for the first 28 weeks of their illness, may need money more speedily. For them, contracts with some friendly societies may be better even if the level of income replacement is not high.

Planned Savings, normally costing £4.25, is available to IoS readers for £3 (inc P&P). Send cheques, made out to Planned Savings, to: Eve Lewis, Audit House, 260 Field End Road, Eastcote, Middlesex, HA4 9LT. The Holden Meehan guide to PHI is available free by calling 0171-404 6442.