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Out of work, but not out of pocket

Have you ever worried about how you would pay your mortgage and bills if you were to have an accident or fall ill? Since April this year more people are having to worry about this, as state invalidity benefit has changed, making it much more difficult to claim. Now those hoping to claim benefit have to prove that they can no longer perform any occupation, rather than merely their own. The Government's aim is to make people less reliant on the state and persuade them to insure themselves privately. Permanent health insurance, or income replacement plans are the policies designed to pay out if the policyholder is unable to work. But in recent years the number of such policies taken out has been falling, mostly because of price rises.

PHI policies pay out up to 75 per cent of earnings less state benefits when someone is off sick. The chances of being off for a long time are high. You are 14 times more likely to be off work for at least six months than you are to die before you reach 65. Most companies do not start to pay out until at least six weeks after the illness has been diagnosed. But premiums can be reduced by opting for a longer deferred period.

Cost is going to be the main consideration for most people. But it is also important to check the small print. Some companies still pay out if you cannot perform your own occupation, others are much stricter. Most rates are reviewable every five years but some companies reserve the right to increase the rates as required.

The premiums can be high, especially for those in the higher age brackets. It is hardly surprising that PHI remains out of most people's reach. However, the Unum company has reacted to this by limiting the period of insurance payouts. Instead of continuing until retirement age is reached, it has introduced an option where the claims can be limited to three or five years. If this proves popular other companies are expected to follow suit. Unum says that 70 per cent of people stop claiming within five years and 56 per cent within three.