Income replacement
insurance provides an income should you
be prevented from working due to sickness
or injury. It is commonly known as permanent
health insurance or sometimes PHI schemes.
The word "permanent" in the name,
refers to fact that the policyholder is
the only person who can stop the cover
during the term of the policy (this would
be through the none- payment of premiums
or cancelling the policy directly.) The
insurance company cannot withdraw cover,
under any other circumstance, once the
contract has been accepted and premiums
have commenced. |
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| These
plans work by paying you an income, usually
equivalent to 50 - 65% of your usual salary,
if you are unable to work for a long period.
The income is generally paid until you reach
your usual retirement age but will automatically
ceases if you return to work prior to this
point. |
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If
you are self-employed then the benefits
under the plan are calculated based on
the amount of your taxable income or profits,
normally for the 12 months before you became
unable to work.
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| Care should
be taken to check what the insurance company
means by disability. As a general rule it
is better to consider a plan that pays the
benefit if you are unable to carry out your
usual occupation. This type of cover is referred
to as 'own occupation'. Some plans will only
pay a benefit if you are so sick or disabled
that you cannot work at all. You should take
into account that it is far less likely you
will be unable to do any work than you are
unable to continue your usual occupation. |
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| The income
from a PHI plan or scheme is tax free (hence
the restriction to 50 - 65% of your usual
income ), but you do need to be aware that
any income you receive may have an impact
on any state incapacity benefit that you
wish to claim. There can also be situations
where if you are receiving income from other
sources, during the period of your sickness
or injury, the benefits under you plan could
be scaled back. A good example is where you
are forced to retire early from your usual
occupation and start receiving an ill health
early retirement pension. In such instances
the Insurance Company may scale back the
benefits under your PHI plan. |
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| The differences
between plans are: |
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The
definition of occupation: Some plans will
only accept a claim if you are unable to
do any work, it is normally more advantageous
to consider plans that provide cover against
you being unable to carry out your usual
occupation. |
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Term
of the cover: whether this is for a fixed
term or throughout the remainder of your
life. |
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Waiver
of premium: Where the premiums to the policy
are suspended throughout the duration of
a claim. However the policy is continues
to be active and if you return to work the
policy, and the protection available from
it, is reactivated. |
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Index-linked
benefits: During the term of the policy,
the level of cover increases in line with
rises in your salary, a chosen index or perhaps
rises in general inflation. In these instances
the premium levels may also increase by a
similar rate. |
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Fixed
premiums: the premium levels are fixed at
outset and remain the same throughout the
whole of the policy's term. |
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Deferral
periods: these represent the time periods
that you must be away from work, due to illness
or disability before the benefits under the
policy may be claimed. Deferral periods range
anything from 4 weeks to 12 months. Generally
the longer the deferral period the lower
the premiums to the policy will be. |
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You
should ensure the length of deferral period
established within your plan is appropriate
to your circumstances. Many employed
people can afford to set longer deferral periods, as their employers
choose to pay them their normal income during the early months
of a long term illness. The Self-employed should think carefully
about the appropriate period of time of the deferral period. |
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| Employee
Options |
If
you are employed, it would be wise to check
the level and structure of any sickness
pay arrangements offered by your employer.
Often employers elect to pay your usual
salary for a given time before decreasing
or, perhaps, stopping it altogether. The
information available from your employer
will make it possible to work out the deferral
period most appropriate to your circumstances.
Ideally you would claim benefits from the
policy at the end of the period where your
employer provides income. This would ensure
you always have sufficient income, from
either your employer or the policy, to
provide for your needs.
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| Check
the wording of all policies, especially the
insurer's definition of disability. You would
also be wise to consider any restrictions
that are placed upon the type of work you
might be allowed to do, were you unable to
continue your normal employment. |
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| Certain
occupations are statistically more likely
to cause illness or accidents, this means
the risk of a policyholder making a claim
is greater for the insurer. This extra risk
has two ways of showing itself, either through
higher premiums for such occupations or in
a greater number of restrictions under the
policy. |
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| For
further help and free advice please email
us. |
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