Your money: Protect yourself: draw up a plan

Holes in the benefits safety net are getting bigger. Andy Couchman on making your own arrangements

The Lord Chancellor may not believe that DIY is appropriate for his wallpaper, but, elsewhere in Government, DIY is fast becoming attractive when it comes to welfare reform and protection insurance.

The Government's Green Paper on welfare reform, launched by Frank Field in March, has, as one of its success measures, a commitment to increasing the amount of your money going towards savings and insurance - without increasing the proportion borne by Government. Many believe the Green Paper signals a move away from a welfare state and towards personal welfare programmes.

There is already a gap between what protection the Government will provide and what most people would need to maintain a reasonable standard of living, and that gap is set to widen. State benefits no longer provide a complete safety net - if, indeed, they ever did. Incapacity Benefit, the main assistance for those with a long-term illness or disability, pays a top rate of just pounds 64.70 a week; and, since 1995, mortgage interest payments are no longer fully protected by the state.

Benefit spending stands at around pounds 93bn a year, and is likely to reach pounds 100bn by 2000. This is almost as much as the pounds 107bn now raised from income and corporation taxes.

There are no guarantees of good health or a secure income at any age. One in 10 people under 45 report a long-standing illness or disability. For the over-45s, the figure is one in four. Men are 18 times more likely to be off work due to illness for six months or more than they are to die before reaching the age of 65.

Figures from the Department of Social Security show that the number of people claiming Incapacity Benefit is 1.75 million - three times the level in 1980-81. This is despite the recent introduction of a much tougher test that measures a claimant's ability to perform any work rather than just the work undertaken by them normally; an experienced graphic designer won't qualify if it can be shown they could be working as a car-park attendant.

The problem for the Government is persuading those with the means to protect themselves that personal welfare safeguards are the way forward. For now, it may well be adopting a softly-softly approach to raising awareness of the protection deficit, but eventually the gloves will come off. Future welfare changes, while focusing on better targeting of those in real need, are likely to result in more means testing or taxation of benefits to assess that need.

In response, insurers are developing policies offering more choice and a range of help services as well as financial benefits. Already some plans pay benefits where the State would pay nothing. Mostly too, insurance benefits are paid free of any tax - an area where the Government has generally become more rather than less generous in recent years.

It is perhaps ironic that the pounds 64.70-a-week Incapacity Benefit is now taxed, while income protection insurance, which typically pays up to half your income or more, is not.

The Adam Smith Institute believes we may all end up having our own personal welfare programmes. They would follow the pensions model currently espoused by the Government, in which everyone has second-tier provision to supplement their basic State pension.

The time may soon come when, as with Individual Savings Plans, we can buy our protection through our local supermarket. Already Marks & Spencer, Virgin and Boots the Chemist offer health and welfare plans, but success to date has been mixed.

Saving a few extra pounds as part of the weekly shop is one thing, but making the often complex decisions as to what protection cover you need and what type of policy is best is quite another. So far, traditional insurers have had most of the success, but that may be due to change as the big brands learn how to capitalise on the information they already hold about their customers.

Last year, UK insurers sold 3.3 million new life assurance policies (including 580,000 serious illness plans), renewed private medical insurance cover for six million people, and covered an estimated 150,000 against the effects of losing their income through illness or disability.

Add to that the millions of people covered under group life and pensions policies, the 15 million with creditor or loan insurance and the six million with health care cash benefits, and it is clear that protection is big business.

Much of the detail of how the new welfare system will develop is yet to be tabled, let alone discussed or implemented. That does not mean that it pays to wait.

Over 1,000 creditor insurance claims a day were paid out by insurers last year, but only one in three new mortgages was protected by mortgage payment protection insurance. More than 100 people a day, most of them elderly, had to sell their homes to pay for their long-term care, yet only 6,000 people took out long-term care insurance.

DIY may not be the first choice of the Lord Chancellor, but for many of us it will be the way to go to ensure our personal welfare.

Andy Couchman is the publishing editor of HealthCare Insurance Report