Where's your salary's safety net?
Take a moment to stop and think about how you would cope if you suffered an illness that prevented you from working. Would you have enough savings to live off for a while, or would you pin your hopes on generous friends and family for help? Or, are you reading this quietly smug that you've insured yourself against such a possibility?
If you've taken steps to protect your livelihood, the chances are you have taken out critical illness insurance - often alongside life insurance - which pays out if you suffer from one of a list of pre-defined life threatening conditions like cancer, heart disease or stroke. Alternatively, you may have mortgage payment protection insurance (MPPI), which covers your monthly repayments for 12 or 24 months if you get sick or lose your job.
However, you may not have considered income protection (sometimes known as permanent health insurance) - a policy that pays a monthly benefit for as long as injury or illness prevents you doing your job.
Even though plans can potentially pay out hundreds of thousands of pounds, income protection (IP) is routinely ignored by homeowners and financial advisers, who regard it as difficult to sell and impossible to understand.
Figures produced by Swiss Re illustrate the point. While 539,076 combined life and critical illness insurance policies and 506,900 mortgage payment protection policies were sold in 2006, only 130,365 income protection products were bought.
But things are slowly starting to change. While IP policies have certainly been the poor relation in the protection product world, they are now at the centre of a ferocious battle within the insurance industry for the hearts and minds of consumers.
Product providers have embarked on marketing and promotional campaigns to dispel the myths surrounding IP and to encourage more people to consider it. They have also been simplifying their product ranges, using tele-interviewing techniques to make the selling process simpler, hiring qualified medical professionals and introducing rehabilitation schemes to help people back to work.
So let's take a closer look at what income protection provides. These policies pay out for any condition - life-threatening or not - that prevents you from working and provides a regular income until you're either fit enough to return to work or reach retirement age. This contrasts with critical illness (CI), which pays out a lump sum on the diagnosis of a pre-defined illness.
IP also has clear benefits over other popular policies, such as MPPI, explains Linton Penman, head of retail marketing at provider Unum. "IP claims provide benefits for much longer than MPPI policies which, typically, only pay out for a maximum of two years - which means that just when a person has come to rely on the money it is taken away," he explains.
"A typical MPPI policy will also exclude conditions such as stress, depression and back pain whereas IP policies have very few exclusions. If a condition is stopping a person from earning a living you can be confident it will be covered."
The real risk of ill health
It's a fair point. According to the Health & Safety Executive, a staggering 35.7 million working days have been lost due to illness or injury during the past year. Of these, almost 14 million were due to stress, depression or anxiety, while around five million were down to back problems.
Unlike MPPI - which normally only covers your mortgage costs - you can insure enough to cover your mortgage, any other debt repayments, bills and all other outgoings.
The arguments in favour of IP are so compelling, believes Matt Morris, a policy adviser at protection broker Lifesearch, that it's difficult to understand why it's one of the most undersold insurance products. "It should be top of most people's wanted list because it's relatively cheap for what it is and could potentially pay out until someone retires," he explains. "If someone fell ill at the age of 30 it could pay out for more than 30 years."
So, if IP offers such attractive benefits, why are so few people buying it? According to Jennifer Gilchrist, group product development manager at Scottish Provident, it's not so much criticisms of the products that hold back the industry, but misconceptions surrounding the policies and the mechanics of how they are sold.
Naturally, cost will always be an issue. As with life and CI cover, your age, gender and state of health will all affect the price you pay. Price increases with age and women can expect to pay more than men. But unlike other insurance policies your occupation is also a factor. Those with manual jobs are likely to pay more than those who sit at a desk all day, as the risk of injury is higher. Perhaps surprisingly, rates are higher for teachers - although they're unlikely to have an accident, they are prone to stress and anxiety.
However, there are ways to make it more affordable. The deferred period - which is the length of time before payment starts - obviously affects the cost. The longer this period, the lower the premium, points out financial planning strategist Donna Bradshaw from IFG Financial Services.
"If people have sufficient funds in reserve that can cover them for the first three to six months then this will dramatically reduce the cost of income protection," she explains. "I'd advocate everybody having an emergency fund of cash they can use." You may also be able to opt for a longer deferred period if your employer has a generous sick pay policy.
What about their track record over paying claims? A complaint often levelled at CI is that the definitions are so tight, claiming isn't always as straightforward as policyholders expect. Not every IP provider gives details of how many claims are passed and rejected, which makes it difficult to draw conclusions about the industry as a whole. Some companies like LV=, however, are willing to discuss figures.
During 2006, the company paid 86.1% of claims at a total cost of £14.4 billion. Of those paid, 29% were for mental disorders, 22% for cancers, 17% for disorders of the nervous system and 2% due to road traffic accidents.
John Perks, customer solutions director for LV=, insists it looks for reasons to pay a claim - rather than turn it down. "The reason for not paying out in almost 10% of cases was because the claim either didn't meet the definition in the plan or wasn't actually covered by the policy," he explains. "In 4% of instances it was down to non-disclosure, although we work hard to help the innocent consumer avoid such issues."
But IP policies don't just provide cash payments. Many providers are keen on helping individuals get back to work and pay out for extras such as private medical treatment, alternative courses of therapy or even helping them train for a completely new career.
Of course this isn't for solely altruistic reasons. The longer a person is off work the more it costs them, so it's in their interest for people to return to the workplace as soon as possible because it reduces their financial burden.
Linton Penman says Unum has built up a huge amount of experience in this field and has developed its own in-house team of professional, vocational and rehabilitation consultants. "Last year we managed to help almost 1,000 people back into the workplace and these weren't individuals with broken bones that had healed - they were people who, without our involvement, couldn't have returned," he explains.
Looking to the future, providers remain hopeful of turning the tide of public opinion. "IP policies can be hugely beneficial - but people just need to understand the concept," says Jennifer Gilchrist at Scottish Provident. "The market has enormous potential for growth and if everyone works together then IP will get the recognition it deserves."
Permanent health insurance
PHI – now commonly referred to as income protection insurance - pays a regular income if you are unable to work due to long-term sickness or disability and is called “permanent” because the insurer may not cancel the policy no matter how often you claim. It does not cover redundancy, but you could buy it as a bolt-on. The tax-free benefit is payable until recovery or until a specified date (whichever is earlier), but is subject to a deferred period which should take account of any benefits provided by the employer. PHI should not be mistaken for PMI (private medical insurance); a completely different form of health insurance that covers the costs of private medical treatment, not the possibility of you becoming ill and being unable to work as a result.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.