Knocked back, not knocked out

Common, long-term complaints such as depression or back pain need not leave you penniless, says Tony Lyons

Statistics show that between the ages of 30 and retirement, a person is 10 times more likely to suffer from a long-term illness or accident than they are to die. Of the population aged between 20 and 65, over 2 million are claiming sickness or invalidity benefit according to the Department of Social Security. At any time, over 1.5 million have been incapable of working for more than a year, of whom nearly 500,000 have been incapacitated for more than four years.

Grim figures indeed. Yet while most of us have life assurance policies, often to pay a mortgage, not many consider protecting our income in case we cannot continue working.

Being unable to work due to illness or accident will affect all household budgets. Relying on the state is not enough. Invalidity benefits are severely restricted. As long as you earn more than pounds 62 a week, your employer is obliged to pay you pounds 55.70 a week for the first 28 weeks that you are unable to work.

Beyond that, the state pays the same amount for the next 28 weeks, rising to pounds 62.70 after one year. But how many with families could survive on that kind of money? The average outgoing for household bills, including mortgage repayments, is estimated by Legal & General at almost pounds 300 a week.

Less than one in 10 of the workforce has any sort of income protection insurance, known in the industry as permanent health insurance (PHI), according to Ronnie Martin, manager of life and health with Royal & Sun Alliance. "People don't like to think about being unable to work because of illness or accident," he says. "We all have a head-in-the-sand attitude that it won't happen to me."

This is very much a view backed up by all involved in the sale of PHI. "Too many believe that their employer or the state will take care of them," says Lorna Baxter of Legal & General. Most employers will usually keep paying salaries for a while. But when it comes to more serious cases, only a minority of employers operate a staff PHI scheme. This ensures that after a certain amount of time, usually three or six months from being unable to work, there will be a monthly payment of up to three-quarters of net salary. Most employees and the self-employed, however, will have to make their own income protection provision.

There are around 50 PHI plans currently available from insurance companies and friendly societies providing income protection usually to age 60 or 65. They will all pay out a regular monthly amount if the policyholder is unable to continue normally working after a specified period because of illness or accident. Most long-term incapacity is covered, including ME, mental problems due to stress and muscular conditions such as severe back pain, the only exclusions being long-term incapacity due to war or dangerous sports.

Premiums are determined by age at outset, period of cover, sex of the policyholder - females pay more than males as statistically they are more likely to suffer from long-term medical problems - and whether benefits are paid at a level rate or escalate with inflation. The over- riding factor determining premium, however, is the deferment period. If payment is to commence after a month, expect to pay a lot more than if it is to commence after three or six months.

There is a wide variation in premiums. For example, a male non-smoker aged 30 who wishes to provide a flat benefit of pounds 20,000 a year payable after six months of incapacity until aged 60 can expect to pay premiums of pounds 25.67 with Zurich Life, or pounds 42.67 if female. If you wanted the policy to cover you until 65, Legal & General would charge a man pounds 10 a month and a woman pounds 10.58. If you want the benefits and premiums linked to inflation, then the premiums would be pounds 28 and pounds 46.84 a month respectively with Zurich Life.

PHI policies pay out whenever an individual cannot perform his or her normal employ- ment. Some will pay out a proportion if you can do a less arduous job, while others will pay the full amount even if the claimant can do other work.

Experience shows that nearly one-third of all claims are due to mental depression or stress, while around another fifth are because of muscular problems, especially with regard to back pain or arthritis. "These are all debilitating, long-term problems," says Mr Martin, "that are covered by PHI. Yet during the 1990s, people are choosing to buy critical illness policies which do not cover the main medical problems that cause people to give up working. For example, you can often return to work quite soon after a heart attack but you are unlikely to if you suffer from muscular dystrophy."