Exemption for loan insurance helps millions

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The Independent Online

More than 10 million people who insure against sickness or unemployment when taking out personal loans are not to be taxed on the benefits they receive, the Inland Revenue has announced.

The reprieve was part of the Chancellor's Budget statement on Tuesday and followed a bitter political row in May, when Kenneth Clarke was forced into a humiliating retreat on mortgage protection cover, only to discover that some of his officials were still separately aiming to tax loan insurance.

Had their plans taken effect, policy holders who lost their jobs would have found shortfalls of up to 25 per cent in the cover they thought they had taken out with insurers.

Mr Clarke's retreat from taxing benefits was welcomed yesterday by Pinnacle Insurance, one of the top providers in this field: "We think it is right that the Government should have confirmed a position that had applied in principle since the confusion that took place in May," a spokesman said.

"Ending the uncertainty means that more people will be prepared to protect themselves, which is what this Government has been encouraging ..."

Total annual premiums paid for loan protection cover are about pounds 1bn. Cover for a pounds 5,000 loan costs between pounds 15 and pounds 20 a month, with up to half of all borrowers choosing to take it out.

Pay-outs are triggered when a person is still not working 30 to 60 days after becoming unemployed.

As an additional boost to about 1.35 million policy holders, the Government also announced that permanent health insurance (PHI) pay-outs will not be taxed when people become unemployed as a result of illness.

Until now benefits, which replace wages lost when a person becomes permanently ill or disabled, were taxed after the first 12 months.

The tax relief on PHI follows a decision earlier this year by the Department of Social Security to replace invalidity benefits with a new category of incapacity benefits. Critics have argued that the move, which took place in April, was aimed at denying benefits to some 400,000 disabled claimants.

Insurance companies said yesterday the decision means that from April next year basic rate taxpayers would receive an extra boost to their PHI policies of between 20 and 30 per cent after 12 months. Alternatively the cost of premiums would fall by the same amount. Savings would be greater for higher rate taxpayers.

Graham Clark, deputy actuary at Swiss Re, which sells PHI cover said: "In many ways, this is a reflection of the Chancellor's announcement in the Budget of a partnership between the state and the insurance industry ... We hope this will give a major boost to the market."