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income protection |
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Permanent Health Insurance (PHI) or Income Protection is designed to give peace of mind that should you be unable to continue providing for yourself or others, you won't be left in complete financial disarray.
PHI policies will not specifically pay off your mortgage or other loans, nor will it pay for private medical treatment or special needs that arise through disability.
What it will do is provide you with a regular weekly or monthly income if you become unable to work as a result of accident, sickness or disability. PHI is payable when the person covered by the policy becomes unable to work due to long-term sickness, or incapacity due to injury or disability.
PHI policies will have a deferral period specified in the policy details. This is the length of time that you have to be out of work before benefits become payable. The standard deferral periods are usually 4, 13, 26 and 52 weeks. The shorter the deferral period, the more expensive the premium will be.
The benefit will commence at the end of the deferred period and will continue until the earliest to occur, that is:
- Termination of the Period of Disability
- Death of the Insured person
- Plan expiry date
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Benefits are tax-free when premiums are paid personally or taxable when paid through your company. If your company pays the premiums they are classed as a legitimate business expense and are without benefit in kind costs to you.
- Benefit Limits
Legislation states that the benefit payable from a PHI policy cannot exceed a certain percentage of your income immediately before disability occurred. Therefore, it is important that you notify us if your income reduces as failure to do so could result in you paying for a benefit that is in excess of the maximum that can be provided.
Insurance companies will also usually limit the cover they will provide. This is usually 55% of your gross earnings less, if you are self-employed, your trading expenses. Because income payments are tax-free, this is not as harsh as it may seem.
- Indexation of Benefits
Indexing your sum insured allows you to maintain the real value of your protection as it automatically increases each year, regardless of your state of health at that time. Your contribution will also increase each year to reflect the increase in the sum assured.
- Deferment Period
Benefits can become payable after one month of an illness or accident preventing you from working, or you can select a deferment period of up to two years which will greatly reduce the cost of the insurance. If you are employed it is sensible to select a deferment period to coincide with when your employer will stop paying your salary.
- Types of Cover
Guaranteed cover: under this plan the rate at which premiums are payable is guaranteed by the insurance company for as long as you maintain contributions. In the long term this can be an extremely valuable feature.
Reviewable cover: under this plan premiums are kept to a minimum as you, rather than the insurance company, are shouldering the risk of changes in morbidity experience. The insurer has the right to review premiums based on claims history, which could mean premiums increase significantly at a review. Reviews are normally carried out every five years but may vary from one insurer to another.
- Occupational Class
Insurers divide jobs into groups according to the risk of injury or illness being caused by the occupation you follow. These groups are known as occupational classes. The premiums charged for a higher risk class of occupation will obviously be higher, but insurers may have very different scales of occupational class and depending on their claims experience may also have very different views about the occupational class they attribute to your job or the duties you perform.
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