Income Protection (Permanent Health Insurance)
What would you do if you were unable to work long-term due to
accident or illness? Your employer would pay you for a while, but then
you would need to look to savings, pensions if any, social security, and the generosity
of others.
Income Protection insurance is designed to pay you a replacement
income if you are unable to work. Industry rules dictate you may not
insure all of your income, but may insure most of it (two-thirds to
three-quarters is typical).
If you are employed and have group arrangements available to you,
then in most cases that will be the choice to follow. Group schemes
carry valuable premium discounts through economies of scale, and are
often non-contributory for the employee.
For those whose employers do not provide group arrangements, or the
self-employed, then individual policies are available.
Taxation of Benefits:
As a general rule, benefits paid on
privately-funded income protection policies are paid free of income and other taxes. This
is important when estimating the extent of cover required.
For group schemes funded by the
employer, the benefits will ultimately be taxable in the hands of the
employee.
Example 1:
Stephen, aged 28, solicitor and a non-smoker, earns £45,000 p.a. He
wishes to insure at least £22,500 p.a. net benefit, which is to be indexed by the
Retail Prices Index, and he requires guaranteed premiums. He also
requires "own" occupation definition, which means any claim
would consider his ability to carry out his own job (as compared with
"any" occupation which would assess his abilities much more
widely). His
employer would pay him for three months on full pay and three months on
half pay. Stephen requires the policy to run to anticipated retirement
age, 60.
Although he could take a "split" policy which would
include some cover for months 4-6, Stephen opts to self-insure that period, and
chooses a deferred period of six months.
Stephen's monthly premium is just over
£23*, and is
guaranteed not to increase except in line with
his chosen index. The insured benefits are initially £1,875 per month,
and will increase by the same index.
* Source: Assureweb quotation engine
September 2008
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