Don’t get stung: ensure you have the right work cover

Published on 09/09/2012 01:12

Sadly. no one can predict that an accident may happen or sickness incur that is so severe that you are unable to continue working. Yet the bills – from mortgage payments to utility invoices – keep arriving.

Statutory sick help is welcome but may be totally inadequate to maintain your current lifestyle. This may be boosted by some in-house company provision but, again, may not make up your earnings.

Few firms can afford to pay a full salary to staff who have a major accident or severe illness for long. With 97 per cent of businesses in the UK employing fewer than ten people, expect a reduced rate after a few weeks while cover for the self-employed is more vital than ever.

Many people are confused about the term “income protection”, which has been tarnished by the mis-selling of payment protection cover. In fact, income protection (or IP for short) is a very distinct product.

IP provides a pre-agreed amount directly to the policyholder (or their nominee) for a pre-agreed time in the event that incapacity or involuntary unemployment arises through sickness or an accident and is unable to work.

Check that a policy stipulates your specific job, not a generic description. A claim would be because you were unable to carry out your particular job description, rather than any occupation.

A dentist may be capable of undertaking the work of a community gardener but his dental skills have been honed for a particular profession and his

remuneration will reflect that status.

In place of “own occupation” some providers slip in the words “inability to perform two out of six work tasks”. Avoid such plans as they are designed to demean a person’s qualifications and use such generalities to not pay out in the event of a claim.

Check, too, if payments may be reduced by the level of any state aid. Also enquire what the situation is if a career break is taken and, if so, for what duration.

Policies are written for up to five years and do not depend on the credit worthiness of the policyholder. All payments under an IP policy are tax-free which is a key benefit that receives little publicity.

As IP takes the pressure off the state, the Treasury should consider another tax concession: either income tax relief on IP premiums or a reduction in the National Insurance paid, both by the employer and employee.

“For single people, IP is more important than life cover because, in the event of being unable to work for a period of time, you have an income coming in to meet your bills,” says Grant Walker of Edinburgh Risk Management.

Even if you have a policy in place, it should be reviewed every few years to ensure the level of cover is still relevant. Some policies increase cover by an annual 5 per cent which ensures any payment does not erode too far in value.

“If your income has not been increasing at this level, you may find you are over-insured and, in the event of a claim, benefit will be restricted,” warns Walker.

“IP is much undersold. As part of our wealth management process, ensuring all personal risks are covered is an integral part of what we do,” says Roland Oliver of Musselburgh-based Oliver Asset Management.

His software can show the effects of having no income or reduced earnings for a given period of time and how they will impinge on long-term financial plans.

“Often not considered is the cost of partners who do not work,” says Oliver. Bright Grey, a noted IP provider, has identified the cost to replace these individuals in the home at around £30,000 annually.

One idea is to ask your IFA for a “menu” style plan to ensure all personal liabilities are covered and that there should not be any impact financially if the worst should happen. Bright Grey and Pru Protect offer two such “menus”. The latter has a programme which promotes a healthy lifestyle which can lead to reduced premiums.

If there is some company support, check when this runs out so that IP payments can commence from that date. Such a deferred period will cut the monthly premium.

Scott Mackintosh, director at EIC Ltd in Edinburgh, urges employees to first establish for how long and at what rate an employer would provide financial care and then work out how long you would be able to be self-sufficient.

He warns that “sometimes the cheapest providers are not always the best. Like most insurance plans, there are exclusions that will apply to different plans and so it is critical you fully understand what you are being protected for and at what level.”

PruProtect is tipped by Mackintosh as it offers a comprehensive plan which has flexible options in terms of adding in or reducing benefits during the plan term. He likes this approach as circumstances change over a working life and so their protection should similarly.

Cirencester Friendly and LV= (the former Liverpool Victoria) offers budget-cover plans. Walker says both LV= and Legal & General “tend to be very competitive”. He says that some budget plans may only pay for up to two years in the event of a claim while normal IP insurance pays out until the expiry date, which is usually a client’s retirement date.

The EU gender directive later this year will affect rates. It is likely that premiums for males may rise by as much as 28 per cent to equate with female IP policies and so now could be a good time to purchase if you are a man.