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Email: info@cheltenhamifa.co.uk
What is Permanent Health Insurance?
Permanent Health or Income Protection Insurance is designed to pay you a regular tax free monthly income if you are incapacitated and be unable to work due to illness or injury. The amount of cover is based on a percentage of your gross earnings and is suitable for both employed and self-employed people. There is no limit on the number of claims you can make and if you are never able to work again it will be paid until your selected retirement age (Max 65).
Who can benefit from taking out PHI cover?
- Anyone who does not get paid indefinitely by their employer when off sick from work should consider a PHI policy
- Most people would not be able to maintain their standard of living if they had to rely on benefits from Statutory Sick Pay and Incapacity Benefit so PHI could form a key part of their financial protection needs
- PHI may be ideal for Self employed people who would not receive any employer benefits if off work due to illness or injury
- People who are unemployed or house persons are also eligible for PHI up to a level of £5054 per year
- Anyone between the ages of 16 and 59 can apply for PHI cover
In what way does PHI differ from Accident, Sickness and Unemployment cover?
Both Permanent Health Insurance policies (PHI), and Accident, Sickness and Unemployment policies (ASU) are designed to replace a person's income should they become incapacitated and therefore be unable to work. However, there are some major differences between the two types of cover:
Permanent Health Insurance cover (PHI) or Income Protection or Replacement policies are designed to provide the policyholder with a replacement income in the event of a long-term sickness or disability. Payments are usually made when the policyholder cannot undertake their own or any job due to illness or injury (it is also worth pointing out that in the majority of cases cover should be sought that protects your own occupation).
Accident, Sickness and Unemployment (ASU) policies will also protect a person's income against illness or injury. However, the main point of difference is that it will also protect a person's income if they were made redundant by their employer. Some ASU policies will also allow you to choose whether you want to receive benefits for accident and sickness only, unemployment only or all three.
PHI will pay out a guaranteed level of income every month for as long as your incapacity continues; if necessary until your 65th birthday or when you retire. Normally, there is a maximum benefit payable from such a policy; this is usually 65% of a person's annual income, less any benefits that they are entitled to from their employer and the state, it is important to remember this benefit is paid tax free.
- So long as each claim is legitimate a PHI policy can pay out a number of times and the insurer cannot cancel the policy as long as premiums are maintained
- Depending on the premium that you're prepared to pay, the monthly benefit payments can be linked to the Retail Prices Index (RPI). This means they automatically keep pace with the official cost of living, a process known as 'inflation proofing'
- These are usually payable for a maximum of 12 months although some policies will pay the benefit for up to two years depending on the insurer
- With ASU you are able to choose the amount of benefit you would like to receive (within certain limits)
- The premium will be calculated as a percentage of the amount of monthly benefit you would like to receive and hence the higher the amount of cover, the higher the associated premium costs
- ASU policies will only allow a single claim, at which point the policy will be cancelled, so you would need to re-apply to set up a new policy
- You do not have the option of 'inflation proofing' an ASU policy. The benefit, once chosen, is fixed and if you wish to increase it then you must apply again for a new policy with a new benefit
Should I consider this type of policy to cover my mortgage?
- Accident, Sickness and Unemployment insurance (ASU) will cover you for 12 months with immediate effect from when you are off work due to an accident, becoming too sick to work or becoming unemployed
- If you return to work the policy can end and the benefit will stop. The insurer has the right to cancel the policy at any time and it is reviewable and also renewable on an annual basis. This means the insurer can cancel or increase the premium at the annual review date
- ASU policies have no deferment period from which the benefit can be taken and in some cases if you receive any employer sick pay you will not be entitled to the ASU benefit until the employer’s pay stops. It could also be argued that another drawback of ASU is that you can only cover a percentage of your mortgage monthly repayment plus some additional costs (which will vary from insurer to insurer). This means that while your mortgage payment is covered, you may not be able to cover all of your normal outgoings
- Permanent Health Insurance (PHI) has a much broader long term outlook regarding its protection of your mortgage repayment. The product is flexible, incorporating a deferment period from when the benefit will start to be paid. This enables people who have employer's benefits the option of a lower premium if they wait a while before the insurance company begins to pay
- The main advantage of the Permanent Health Insurance over Accident, Sickness and Unemployment cover is the fact that PHI will pay out over a longer term, until the return to work or the designated retirement age. This will ensure that mortgages can be covered over the long term
- The maximum benefit that can be covered per month is usually 65% of gross income, less any state benefits that the policy holder may be entitled to. This enables policyholders to cover both the mortgage repayment and any other bills that they may have
- The PHI cover cannot be cancelled by the insurer, even after a claim has been made, meaning that some form of cover will always remain in place
- Permanent Health Insurance is a more prudent long term option for protecting your mortgage repayments and other outgoings. Not everyone will recover within 12 months of becoming ill and be able to return to work and therefore PHI cover will help to ensure the maintenance of a standard of living similar to that of when working
What about my occupation and the premiums to PHI?
The likelihood of accident or illness varies depending on what occupation you do and premiums will vary to reflect this:
- A roofer may pay a higher premium than an office clerk due to the higher risk nature of the job
- There are specialist providers who do not charge you more for having a higher risk occupation, and therefore they may be more suitable for you
- We offer independent advice, and are able to search the market and place you with the most suitable provider for your occupation.
What are Deferred Periods?
- A deferred period could also be called a waiting period. It is the period of time that you need to be off work due to illness or accident before your Income Protection Policy begins to pay out
- This time period is selected by each individual and is normally dictated by the sickness benefits that your employer provides
- If you are Self Employed or receive no sickness benefits from your employer, then you will usually require a very short deferment period
- Deferment periods can range between 1 day and anything up to 24 months dependent on an individual’s circumstances, it is important to bear in mind that the shorter the deferment period the more effect it will have on increasing premiums
What affects the premium I pay?
There a number of things which can affect the premium you may pay these are such things as:-
This article (What is Permanent Health Insurance?) is intended to provide a general appreciation of the topic and it is not advice. Guidance should be sought from a specialist who is qualified to advise in your specific circumstances.
For more information on this aspect of "life insurance - what you need to know", please contact Cheltenham Independent Financial Advisers Limited on 01242 269656 or email us at info@cheltenhamifa.co.uk. One of our advisers will be happy to assist you.
