Many of us will be ill at some time of our lives, whether it is man flu, or something more serious.
Whilst man flu won’t result in financial ruin, a serious illness with a long period of time off work could result in severe financial hardship. This is especially going to be the case for private sector workers who do not have more than the statutory minimum cover from their employer.
Statutory sick pay is capped at £87.55 per week and lasts for up to 28 weeks. Many people with mortgages and other financial commitments would be unable to survive on this level of income and a long period of sickness could result in losing the family home.
Unsurprisingly, the insurance industry has come up with a solution. Income protection policies – also known as permanent health insurance – are designed to bridge the gap between State benefits and the income required to pay the bills and living expenses.
These policies can be set up on an “own occupation” basis, where the policy pays out if the policyholder can no longer do their own job because of illness. Less common are “any occupation policies” which only pay out if the policyholder cannot perform any occupation. It is much more difficult to make a claim on the latter and they should generally be avoided if possible.
Cover usually lasts until retirement and benefits can either stay level or rise in line with inflation. The cost of cover depends on age and occupation and the length of time off sick before the policy pays out. This is known as the deferred period. A policy with a deferred period of six months would be considerably cheaper than a policy with a deferred period of one month. For example, a 30-year-old office worker with a policy that
pays out £1,000 per month up to age 65 would pay £28 per month if the deferred period was one month, but only £16 per month with a deferred period of six months.
So, if your employer doesn’t offer a longterm sickness scheme, then consider these policies as a cheap way to protect your lifestyle in the event of illness.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: firstname.lastname@example.org