Income Protection Insurance (PHI) – an introduction

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Many people have heard of income protection – yet many remain unsure exactly what it is and how it can be used to protect their family and themselves.

What is Income Protection?

As the name suggests, Income Protection Insurance, previously known as Permanent Health Insurance (PHI), is a type of insurance which is designed to replace lost income in the event of long term illness or accident.

Unlike Mortgage Protection Insurance and ASU cover, which usually pay an income limited to 12 months, Income Protection Insurance is designed to pay replacement income right up until retirement in the event of the claimant being unable to return to work.

How much Cover can I get?

Life companies will normally cover you for between 50% and 60% of your pre-disability income. In the event of a claim they will normally deduct any continuing income or state single person long term disability benefit.

A claim once in payment under an Income Protection plan is normally paid free of UK income tax.

Under what Circumstances will a Claim be paid?

This is dependent on the basis on which the plan was originally set up: –

Own occupation – pays out if unable to perform your own occupation as disclosed on the application form

Any occupation – pays out if you’re unable to work at any occupation, normally based on work in line with your education and training

Activities of Daily Living – this type of plan pays out if you are unable to perform a number of task – such as eating, dressing, using the toilet etc – you need to be unable to perform a number of tasks from a range of tasks stated by the insurance company – e.g. any 2 from a range of 6 tasks.

Own Occupation cover generally carries the highest premium rates – and may not be available for riskier occupations e.g. working at heights, with explosives, dangerous occupations etc.

How Soon Can I Claim?

You normally submit your claim as soon as you stop working. The payout on the plan will not start until the end of the “deferred period” – you choose this at application – e.g. one month, three months, six months, twelve months.

Warning – the deferred period can in some instances commence from the date of notification to the life office, NOT the first day of sickness – make sure you don’t wait too long to tell them of a claim.

Naturally the longer the deferred period, the lower the premium, since you are less likely to make a claim on the policy.

What About Inflation?

You can set up your plan to allow for annual rises in the cost of living and most people opt for this benefit – your level of cover generally rises each year with a corresponding rise in the monthly premium to offset the general increase in the cost of living over time.

What About if I am Well Enough to Return to Work?

Normally your claim stops but you carry on paying premiums and your policy continues – the insurance doesn’t end.

There are various options under these plans which may be available: –

Proportionate benefit – if you returned to work in a lower-paid position as a result of your illness then a proportion of the benefit may continue to be paid

Rehabilitation benefit – if you returned to work after a period of illness and your income falls, then this benefit may pay a proportion of your cover to cover the loss of income and this benefit normally pays for up to 12 months.

Linked Claims – if you return to work following illness, and subsequently have to stop working due to the same condition then this benefit means you don’t have to go through the same deferred period again and the claim payout can recommence without delay.

Choosing a Policy

We believe that income protection insurance is vitally important for all individuals – especially those who do not have any cover through their employment and, in particular, the self-employed.

Most people are dependent on their incomes – simply ask yourself this question – “how long can we survive with no income?”

Naturally every policy is different so it is therefore important to take advice from an Independent Financial Adviser.

In our next article we will consider this type of cover in more detail and the practical uses to which is can be put

Please share with us your experiences and thoughts on income protection insurance below.

Term Assurance – an introduction

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Introduction

Term assurance is the most basic form of life assurance. As the name suggests, the policy runs for a fixed term.

There is no investment element to a term assurance policy – it is pure insurance – unless you make a death claim then the policy ends at the end of the term and you get nothing back.

Types of Term Assurance

Essentially there are three types of term assurance.

Term only – this provides cover for a fixed term, and if no claim is made, cover ends at the end of the term.

Convertible Term – this is a term assurance policy with a fixed term, but also included is the option to convert to “whole of life” assurance at any time during the plan. The conversion normally occurs without any further medical underwriting; assuming the same level of cover is applied for.

Renewable Term – again a fixed term contract, but with the option to renew a for a further identical term at maturity

How can they be set up?

It is possible to have single life and joint lives assured. So, for example, a husband and wife could take out two single life plans or a joint life, first death plan. With a joint life plan, on first death the proceeds from the policy are normally paid to the surviving life assured.

It is possible to take out two single life term plans, and write them under a suitable trust, for the benefit of spouse and/or children. The benefit writing a single life plan in Trust is that the proceeds from the policy do not enter your estate, where they could be delayed in being paid out, for example to redeem a loan or to provide for your children, due to the need to obtain probate which can take up to and sometimes in excess of 6 months.

We will cover more on Trusts and their uses in a later article.

When do they pay out?

As well as paying out on death of the life assured, modern plans may include “terminal illness” benefits – what this means is if you are diagnosed with an illness which, in the opinion of medical professionals, reduces your life expectancy below 12 months then the plan will pay out the sum assured ahead of your death.

The benefit of this is that you then have time to ensure the proceeds from the policy are used for the purpose which you intended and allow you to get your affairs in order ahead of your passing.

Cover Types

It is possible to set up plans in a number of ways: –

Level cover – the sum assured (amount of cover) remains constant throughout the term of the plan
Indexed cover – the level of cover increased each year, in line with a fixed percentage, to maintain the real purchasing power of the sum assured
Decreasing cover – often taken out at the same time as a repayment mortgage – the level of life cover decreases over time in line with the mortgage profile.

In the next part of this article we will consider the various options which can be included within a term assurance policy as well as the different uses and some special types of term assurance which are useful financial planning tools.