Money: How to stay solvent in sickness

Tim Collison on policies that protect your income if ill health stops you working

ost of us are aware that we have to save for our retirement but what happens if you have to stop work because of ill health before you reach 60 or 65?

While your company may well pay your salary for up to six months, at any one time nearly 2 million of the working population are ill and off work for more than 26 weeks.

Nearly 7 per cent of the working population is claiming sickness benefits from the state, but the basic rate for an adult is just pounds 48.80 a week for the first 28 weeks. This rises again at 29 weeks and at 53 weeks but is taxable after the first six months.

The way to make up for the shortfall in benefits and lost wages is through income protection insurance. This is rather confusingly also known as permanent health insurance. This type of policy will pay out a regular monthly benefit, usually up to retirement date, although two-, three- and five-year policies are available.

As with a lot of health and protection insurance, there are several different types of policy on the market, all with their own confusing literature and complicated procedures. Last year the Office of Fair Trading told income protection and medical insurers to make things easier for the public. This is starting to happen.

Before you decide on the type of policy you want, you need to think about the level of cover you require. Penny O'Nions, of the Onion Group, an independent adviser, says: "One of the key things to remember is not to over-insure. Companies will only allow you a certain percentage of annual income. Some do 50 per cent, others do 60 per cent less state benefits. Others will do 75 per cent of the first pounds 25 000 and then scale the benefits down in layers."

Unum's Personal Protection Income Plan allows you to insure up to 50 per cent of income or pounds 125,000, whichever is lower; Lloyds TSB Life insures up to 60 per cent of your earnings up to pounds 50,000 and one quarter of your earnings above that, less state benefits. All income protection benefits are tax free.

As an example of what it costs, a man aged 35 earning pounds 25,000 in a desk job would pay Unum pounds 15.12 a month to insure half his income would be paid in ill health (payments deferred for six months). A woman would pay pounds 21.68.

If you are employed, you should be calculating the amount you want to insure from your gross salary (including bonuses and commission). If you are self employed you should take your net earnings, less any allowable business expenses.

You next need to decide when you want the policy to start paying out in the event of a claim - the deferred period. The minimum payment deferral period is four weeks and this is advisable for the self-employed policy holder who will not receive any company benefits.

You can buy policies from an independent financial adviser or from a company that sells direct to the public, such as Lloyds TSB. The standard policy on the market is a level benefit contract, which pays a set benefit formulated at the outset. All of the main insurers in this market, such as Permanent, Unum, Norwich Union, Friends Provident and Zurich Life, offer this type of cover. If you want your benefits to keep up with the rate of inflation you can take out an index-linked policy, which tracks the retail price index.

There are also unit-linked policies on the market, which are good if the fund does well, as your premium will be reduced or you can receive a lump sum when your policy matures. But as with all investment-related products, you could find that you have not accumulated enough money to get the benefits that you expected.

It is important to check the policy's definition of incapacity, as they all differ. Most of the better policies will pay out if you become unable to continue in your occupation.

Avoid "any-occupation" policies as you could find your claim turned down on the basis that you are fit to be a road sweeper, when you are trained to be a surgeon.

Premium rates in income protection have remained static for the last few years. Canada Life and Scottish Widows offer some of the most competitive. PPP Lifetime is also viewed by many IFAs as having an understanding and flexible approach to higher-risk applicants, -for example someone who is overweight.

Income protection insurers calculate premiums according to your age, sex, medical history and occupation. Women's premium are between 50 per cent and 100 per cent more than men's - insurers say women make far more claims than men. Premiums for smokers also go up by about 15 per cent.

Insurers categorise occupations according to the risk of a claim, so a metal worker would be in the highest ranking category, four, while a statistician would be in category one.

Many low-paid workers doing high-risk manual jobs have found it hard to get cover at affordable prices. In order to get round this, Unum and Zurich Life have brought out basic policies that ignore a person's occupation and enable the policy holder to buy lower level of cover that is flat- rated.

n Contacts: the Onion Group, 01494 726688; Lloyds TSB Life - contact your local branch. For other firms mentioned, call a local IFA.

n Tim Collison is editor of `Professional Broking' magazine.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
The Doctor and Clara have their first real heart to heart since he regenerated in 'Deep Breath'
TV
Life and Style
Apple showed no sign of losing its talent for product launches with the new, slightly larger iPhone 6 making headlines
techSecurity breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Arts and Entertainment
Jamie Oliver
filmTV chef Jamie Oliver turned down role in The Hobbit
News
The official police photograph of Dustin Diamond taken after he was arrested in Wisconsin
peopleDownfall of the TV star charged with bar stabbing
PROMOTED VIDEO
Arts and Entertainment
Jeremy Clarkson, left, and Richard Hammond upset the locals in South America
tvReview: Top Gear team flee Patagonia as Christmas special reaches its climax in the style of Butch and Sundance
News
people
Sport
Ashley Barnes of Burnley scores their second goal
footballMan City vs Burnley match report
Arts and Entertainment
Peter Mayhew as Chewbacca alongside Harrison Ford's Han Solo in 'Star Wars'
film
News
i100
Arts and Entertainment
Man of action: Christian Bale stars in Exodus: Gods and Kings
film
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Tracy Emin's 1998 piece 'My Bed' on display at Christie's
artOne expert claims she did not
Arts and Entertainment
Catherine (Sarah Lancashire) in Happy Valley ((C) Red Productions/Ben Blackall)
TV
News
Hackers revealed Oscar-winning actress Lawrence was paid less than her male co-stars in American Hustle
people
Arts and Entertainment
Clueless? Locked-door mysteries are the ultimate manifestation of the cerebral detective story
booksAs a new collection of the genre’s best is published, its editor explains the rules of engagement
Sport
Robin van Persie is blocked by Hugo Lloris
footballTottenham vs Manchester United match report
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Homeless Veterans appeal: Former soldiers pay their respects to a friend who also served

Homeless Veterans appeal

Former soldiers pay their respects to a friend who also served
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

The Locked Room Mysteries

As a new collection of the genre’s best is published, its editor explains the rules of engagement
Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

How I made myself Keane

Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Parting view of Ofcom chief... we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
A look back at fashion in 2014: Wear in review

Wear in review

A look back at fashion in 2014
Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

Ian Herbert: My 10 hopes for sport in 2015

Might just one of them happen?
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?