The purpose of health insurance is to provide some money if you fall seriously ill or have an accident, potentially affecting you for many years. In this case, you would probably stop earning, although your financial needs might well be greater than ever. The state benefits you would receive would be relatively low and would be most unlikely to provide sufficient income to meet your needs, especially if you have substantial rent or mortgage payments to make. You might also need capital, for example to make adaptations to your home or to pay off debt. A rainy day fund can help in the short term here, but it’s not a complete solution. The precise level of fund required can vary from person to person, but, as a minimum, three to six months’ expenditure could be used as a guide.
Virtually everyone who is working therefore needs some kind of health insurance to provide financial protection if their earnings are affected by serious illness or disability. Even if you have no financial dependents, there is a very strong chance that you will need health insurance if you are responsible for paying your own bills.
Income protection insurance – sometimes called permanent health insurance – pays a weekly or monthly income if you cannot work because of illness or disability. You may think that you do not need to worry about this kind of cover, but the fact is that in the UK there are nearly 14 million people with a limiting long-term illness, impairment or disability. The prevalence of disability rises with age. Around 8% of children are disabled, compared to 19% of working age adults and 45% of adults over state pension age.
You can generally be insured to receive a monthly benefit of up to about half to two-thirds of your pre-tax income. If you have no income, you may still be able to take out a policy, but the maximum payout will be limited, generally to an income of about £20,000 a year.
Some employers provide income protection insurance, but a very large number do not. Employers are only legally obliged to pay employees, in the form of statutory sick pay, for the first 28 weeks of their being unable to work because of an illness or injury; even then not everyone will qualify, and the employer does not have to pay the full salary. It is worth specifically checking the position with your employer. If your employer provides cover, the benefits generally continue to be subject to income tax and national insurance contributions, at least initially, but you won’t usually have to pay tax on the premiums. If you take out the cover yourself, the benefits are tax free.
Income protection insurance pays after a waiting period on each claim and can usually continue to pay you up to retirement age, unless you recover and return to work sooner. The cover normally lasts until you are aged 60 or 65, but you can arrange the insurance for much shorter periods – say five or ten years – and this cover is much cheaper because it is substantially less valuable. The chances of having a serious illness or disability increase substantially as you grow older.
During the Covid-19 outbreak, insurers have experienced a rise in queries regarding income protection insurance. Generally people who are simply self-isolating are unlikely to be covered. However, a small number of providers will consider claims for self-isolation where it is medically advised. Those with severe coronavirus symptoms that continue beyond the waiting period will start to receive their monthly payout if those symptoms mean they meet their insurer’s definition of incapacity (e.g. they are unable to work at their own occupation). Some providers are restricting cover for respiratory conditions for new customers.
Income protection can appear relatively expensive but can be very valuable if you fall seriously ill. If you are considering taking out a policy these are some of the things you should consider.
| Consideration | Possible issues |
| Exclusions | Check the conditions and exclusions on income protection insurance policies as terms vary between different insurance companies. Almost all illnesses are generally included in the cover, but most have exclusions, for example if the illness is caused by drugs or alcohol abuse.
There is an important difference between cover for being unable to work at your own occupation and cover for being unable to work at ANY occupation. It is much better to have the first type of cover, though it is likely to be more expensive. Otherwise, if you cannot work at your own occupation, under the wider definition the insurer could insist on your undertaking other work. Insurers will generally only pay a proportion of recent earnings as benefits, which can be hard for people who are self-employed or have fluctuating earnings. |
| Inflation protection | It is normally advisable for income protection insurance to be inflation protected in two main ways. You should be able to increase the level of cover periodically regardless of your state of health, or the cover should increase automatically in line with inflation or a fixed percentage. It is also important to ensure benefit payments keep pace with inflation. If benefit payments never increase after you fall ill and cannot work, their real value will be gradually eroded over the years. |
| Underwriting | Insurers are careful when people first apply for income protection insurance. If you have, or have had in the last few years, a health issue, the insurance company may exclude your particular problem, increase the premium or possibly decide not to insure you. Insurers also pay attention to your occupation. You will get the best terms if you work in an office, mostly indoors and do little or no manual work. The cover is much more expensive for people who work with machinery or in relatively hazardous places like factories and farms. |
| Claiming | If you have to make a claim, the insurance company will continue to pay you the benefit until you are well enough to return to work. If your illness recurs, they should start paying the benefit again. Unsurprisingly, they will want to check from time to time that claimants are genuinely incapacitated. |
Example David works as an IT manager. He earns a good salary and he lives a comfortable lifestyle. In the event of being unable to work due to illness, he would receive full pay for up to four weeks, but would then only receive statutory sick pay and, later, state benefits if he is eligible for them. He would not be able to continue to meet his commitments and may have to sell his flat should the illness continue into the long term. David might consider income protection to provide an ongoing income after his employer stops paying him. This could continue until his selected retirement age or, if he wanted to keep premiums down, for a limited term of, say, five years.
Critical illness insurance pays a lump sum if you are diagnosed as suffering from a specified illness. Over 30 conditions may be covered, including serious cancers, heart attack and stroke. Some providers may cover significantly more – even up to 100 different conditions.
The advantage of critical illness insurance is the benefit is paid very early, shortly after diagnosis of the illness, without any significant delay – unlike the usual longer waiting periods of income protection. It is also in the form of a lump sum that can allow you to make rapid adjustments to your lifestyle and pay off loans. The main drawback is that this type of health insurance only covers a limited set of conditions. These are common disabilities, but critical illness insurance generally does not cover some important conditions, such as musculoskeletal pain and most mental illnesses.
People often take out critical illness insurance to cover a mortgage or other loan. Because you are significantly more likely to have a critical illness than die whilst you are of working age, it is more expensive than life insurance. But this reflects the likelihood of needing to claim on the policy.
Critical illness is an important and valuable addition to income protection, but it should not normally be regarded as a replacement for it.
Whereas an income protection policy will pay out to those suffering from severe Covid-19 symptoms beyond the waiting period where the insurer’s definition for incapacity is met, Covid-19 itself is not covered by critical illness policies. However, if the coronavirus leads to one of the conditions listed on your policy, for example a heart attack or a stroke, and you survive the waiting period, the policy would pay out.
Again if you would like to discuss your income protection requirements in more detail, please do give us a call.
This article is for general information and is not intended to be advice to any specific person.
