Make sure your insurance policy is a real life saver

In a perfect world, we would all buy insurance against the financial consequences of horrible things happening in our lives - death, serious illness or long-term health problems.

Unfortunately, we don't. Maybe we have better things to do with our hard-earned money. Or, perhaps we have a deep-seated suspicion that maybe the insurance won't actually pay up in our hour of need.

Every year, one million life insurance policies are taken out that pay up on death. This compares with half a million critical illness insurance plans that pay out a tax-free lump sum on diagnosis of illnesses such as cancer, stroke or heart attack. It also compares with just 100,000 income protection policies bought to provide a monthly (taxfree) benefit in the event of long-term illness.

These numbers defy logic. They should be the other way round. You have more chance of being off work for six months with long-term illness than you have of either dying or suffering a serious illness.

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Income protection insurance

In practice, the protection insurance industry hasn't helped itself when it comes to the sale of income protection, as it writes plans where the policyholder literally has no chance of making a successful claim.

This is a result of the industry's propensity to assess many claims on the basis of loosely written 'activities of daily work' conditions, paying up only if the policyholder cannot perform basic work-related actions.

I recently had a long chat with chauffeur Chris Hargreaves from Manchester, who claimed on his Scottish Provident income protection policy three years ago when he was hospitalised. Without going into too much gory detail, he suffered an embolism on his left lung, lost a lot of blood and had numerous blood transfusions.

Chris spent six months in hospital, comforted by the fact that he had income protection cover. Given that he ran his own business, the cover was vital.

But he hadn't realised that his insurance wasn't worth the paper it was written on. This was because for it to pay out, he had to prove that he couldn't carry out at least two activities of daily work – such as walking unaided on a flat surface or holding a pen.

His policy was set up on this basis because he was seen to be in a high-risk profession where the chances of making a claim were higher than they were for, say, someone working in an office job. His claim was rejected because Scottish Provident simply didn't believe he couldn't carry out these activities.

Chris wasn't prepared to take the rejection of his claim lying down. He went to the Ombudsman and eventually got it to back him. Earlier this year, Scottish Provident was forced to pay his claim and provide him with compensation.

Having won his personal victory, Chris is now determined to get definitions such as 'activities of daily work' written out of all income protection policies. His view is simple: if you can't do your job, the insurance should pay up.

Own occupation

Insurers are slowly coming round to his view and realising that for income protection insurance to become mainstream, all policies should be written on an 'own occupation' basis (paying up if you're unable to do your own job) - something the likes of British Friendly and Cirencester already do.

Aviva has announced that 95% of new policies will be written on an 'own occupation' basis, while a protection insurance industry taskforce has said 'own occupation' should become the "definition of choice".

Hopefully, other insurers will follow Aviva's lead; and braver insurers will go one step further and transfer existing policyholders with cover written on an activities of daily living basis onto friendlier terms.

Income protection insurance should be part of a household's financial foundations. But it will only become so if the insurance industry gets its act together and designs a product fit for purpose.

Jeff Prestridge is personal finance editor of Financial Mail on Sunday. Email him at