You may think that State Benefits will protect
your mortgage payments, but if you cannot work due to an accident,
sickness or unemployment, you will not receive any help for at least 9
months. Following that, the most you that the state will cover is the
interest on your mortgage. More importantly, you will not receive any
help at all with your mortgage payments if your partner works for more
than 16 hours per week or if you and/or your partner have more than
£8,000 in savings.
There are Income Protection plans available through
most lenders and brokers that will provide an income following a loss of
income due to accident, sickness and/or unemployment (Mortgage Payment
Protection Plans or MPP plans). Generally speaking, these plans will
replace part of your income for a maximum of 1 to 2 years after a
'waiting period' of 30 to 60 days.
About Mortgages would normally recommend that people
use these plans to protect their income against redundancy and the first
year of any disability. Many of our customers effect Permanent Health
Insurance (PHI) to protect their income against ill health for the
longer term. The reason for this is that PHI can be tailored to your
needs and circumstances to ensure that you have the cover you need, when
you need it the most without having to cost you the earth.
Permanent health insurance is a type of insurance
that pays out in the event of an illness that prevents you from working.
Permanent refers to the fact that, no matter how many times you claim,
the insurance company is not able to cancel your cover as long as you
keep paying the premiums. This is an important benefit because although
you may return to work a number of times even during a prolonged
illness, the cover will still be there when you need it most - unlike
most MPP plans which have to be renewed annually and may be difficult to
replace once you have already claimed.
Generally, PHI will pay up to 60% of your salary
free of tax either until you are able to resume work again, or until the
plan expires, typically at 50, 55, 60 or 65 years of age (rather than
the year or two protected by most MPP plans), or until you die.
Like other types of insurance, PHI contracts are
agreed for a certain number of years, usually until retirement, or
earlier by agreement.
Do you need PHI?
One way to answer this question is to quote
statistics at you:
2.4 million people are claiming Incapacity Benefit
4 million people are living on Disability Living
Allowance
Nearly 2 million people of working age will be off work
for at least six months at any time through
sickness or disability.
Source - The Naked
Adviser March 2004
The other way is to consider the following scenario:
If, at the bottom of your garden, you had a machine
that generated £30,000 per year in crisp £50 notes; would you insure it
against breaking down or being stolen? You bet you would!! That's
exactly what your health is... the machine that allows you to go out and
earn however much you do each year and, like all machines, the potential
is there for it to break down with little or no warning.
Considering that, shouldn't the question be why
wouldn't you insure your health against breaking down or being stolen?
The next most important question is to check what
your employer’s sick payment scheme is. This is because generally, PHI
kicks in after your sickness scheme and/or MPP run out.
Now you have to decide on the following:
Decide when
you want your PHI to kick in: this can be at any time from 4 weeks to
a year after you become ill, depending on the plan. Many people tend
to start payouts as soon as their company sickness benefits end. But
the longer you wait the cheaper the cost of the monthly premiums.
Choose
which type of cover you want. There are three types:
1. Level Cover: Benefits and contributions remain
level through the plan term. This is cheapest, but the benefits will be
eroded by inflation.
2. Increasing Claim: Benefits increase by 5% during
the course of a claim. Premiums will be comparatively expensive at the
outset.
3. Increasing Cover: Both benefits and contributions
increase by 5% annually. You are, essentially, trying to match premiums
with income, which is a bit cheaper in the long run.
Decide how
much income you want to protect. The most common rule is that the
income paid out by the policy plus any other income from sources such
as statutory sick pay, state benefits and any other insurance must not
equal to more than three quarters of your PRE-tax earnings over the
previous 12 months.
Choose
whether you want an “own occupation” or “any occupation” clause. The
former means that the policy will pay out if you are unable to do your
own job. The latter means it pays out if you cannot do ANY job. For
example, the insurer might argue that a former steeplejack who is now
in a wheelchair can still work in an office.
As before,
the better the policy the more you pay. If you take a lower paid job
after a period of illness, you may only be entitled to a portion of
your Income Protection benefit as the amount received would be based
on the ratio of your drop in income to your original income.
Rehab and
hospital benefits are sometimes available as extras, but the small
print needs to be checked.
Things to watch out for
Medical
evidence is often required. Cover may be more expensive for those in
poor health and existing medical conditions may be excluded.
Don’t
over-insure: if total income after a claim exceeds 60% of pre-claim
income, the policy will not pay out the full amount in the event of a
claim. The relationship between benefits and earnings are tested at
the time of the claim - which means that policyholders only discover
then that they have been paying premiums for useless cover.
There are
usually restrictions applied to the level of benefits most insurers
will offer, these being limited to a percentage of the applicant’s
current earnings less state benefits. This provides an incentive to
return to work wherever possible.
Many
policies are reviewable. This means that if overall claims history,
(not your individual ones, but those of all policyholders), are
greater than anticipated, premiums can rise across the board.
There may
well be restrictions on working/travelling abroad.
Please remember that the amount of Income
Protection you need should be reviewed regularly and as your financial
circumstances change. If you are unsure of the amount of cover or what
type of policy you require you should complete an
advice request to arrange a no obligation review of your needs.
About Mortgages Ltd
Registered in England & Wales No 5170864.
The guidance and/or advice contained within this website is subject
to the UK regulatory regime, and is therefore targeted at consumers
based in the UK.
