How would YOU survive if you couldn’t work?
BEING unable to work due to illness or injury can have a devastating impact on your finances. The selfemployed are particularly exposed as they do not have the protection of an employer’s sick pay.
There are almost five million selfemployed workers – a figure that has grown rapidly in recent years – yet just one in ten workers has cover that would pay out in the event they could not work.
Emma Thomson, head of customer care at protection adviser LifeSearch, says self-employed people are at risk of financial disaster if they do not have savings to rely on. She says: ‘State benefits may not cover even basic household bills and claiming can be difficult. Income protection insurance can provide a safety net at a difficult time.’
TYPES OF COVER
THERE are a range of policies which can protect income. Consumers should take time to understand what is available (see box below) and what suits their needs and budget.
Short-term income protection policies pay out a proportion of your monthly income, typically over 12 months, if you are unable to work due to an accident or illness – or redundancy in the case of employees.
Income protection insurance, sometimes known as permanent health insurance, is a long-term insurance contract. Under these policies, which are more expensive, payments continue to be made until you are able to return to work.
Some of these policies have a maximum payment term, such as five years, but most will continue to pay if you cannot work until retirement age.
They will usually cover up to about 70 per cent of a policyholder’s income. The average payout on such a policy lasts for more than four years and is worth £40,000, according to the Association of British Insurers. It says 91 per cent of claims are paid.
Most good policies will pay out until you can return to your own job or similar work – known as ‘own occupation’. But always check the terms as some cover may stipulate you are covered only until you can return to any paid work.
Self-employed digger operator Mark Howell, 35, from Great Houghton, South Yorkshire, decided to take out an income protection policy last year after his colleague badly injured his leg on a building site and was unable to work for many months. Mark, who is separated and has four children, says a key requirement was the assurance he would still have an income should the worst happen.
He spoke to an independent adviser at Drewberry Insurance based in Brighton who searched the market for the best value deal.
Mark says: ‘I am saving hard to be able to buy my own house. There is no way I could survive financially without earning, so protec- tion is crucial. The application process took just 20 minutes.’
The cost of cover varies depending on your age, job, state of health and whether you are a smoker – and of course the level of cover you require. Mark, who is a smoker, pays £26.10 a month with British Friendly Society and this covers 70 per cent of his £2,000 monthly income.
British Friendly does not load premiums for smokers. The policy would pay out in the event Mark could not do his job due to illness or injury for up to five years or until he could return to his job.
Getting help from an independent adviser is a good idea if you have pre-existing medical conditions or – like Mark – you are a smoker.
Robert Harvey, protection specialist at Drewberry, says: ‘Some providers exclude muscular, skeletal and mental health conditions, yet back problems and stress-related issues are two of the most common causes for income protection claims. A specialist can guide you through the market and find insurers which offer the best terms for conditions such as asthma, diabetes and mental health conditions.’
KEEPING COSTS DOWN
STEPHEN CROSBIE, protection director at insurer Aegon, says consumers can keep premiums down by only covering what they absolutely need.
He explains: ‘It may be that with personal savings and statutory sick pay you only need to replace 50 per cent of your income.’
Crosbie adds that policyholders should keep cover levels constantly under review. He says: ‘A plan taken out a few years ago may no longer be appropriate if your household costs have risen.’
Consumers who have higher levels of savings may be able to sustain themselves for longer in the event they cannot work. In this scenario opting for cover with a longer deferred period – such as six months – could be cheaper.
The job you do can make a big difference to the premium. Lorry drivers, for example, typically pay more as the job is manual and needs good eyesight. Cover for teachers and those in the medical professions can also be expensive as historically there are a high number of claims for stress.
A self-employed administrator who is a non-smoker, aged 40 and in good health, needing an income of £2,000 per month, deferred for the first six months and payable up to the age of 60, would pay a premium of £30.60 per month for ‘own occupation’ cover with Legal & General. A similar worker aged 30 would pay £22.44 a month.