Income Protection Schemes
Before April 1995, we qualified for long-term sickness benefit if we were rendered incapable, by illness or disability, of doing OUR OWN job of work. Since then, the rules have changed to state that we only qualify for long-term sickness benefit if we cannot do ANY job of work. In other words, only if we are completely incapacitated. This means that, for all intents and purposes, there is currently no long-term sickness benefit in the UK.
When you put this fact alongside the progressive reduction in the value of the State's long-term sickness benefit, you may want to consider making provision for yourself and your staff against being unable to continue in your/their usual occupation because of sickness or disability.
If you do choose to go down this route, there are two basic options available to you: Permanent Health Insurance (PHI) and critical illness insurance. Mortgage protection insurance, a third option that is effectively a combination of PHI and critical illness insurance, is something that you or your employees would probably be more likely to arrange privately. Mortgage protection insurance is discussed separately in the Personal Financial Services section of this site.
PERMANENT HEALTH INSURANCE (PHI)
PHI pays the policyholder a tax-free income, usually roughly equal to 65% of their earnings at the time of disability, less anything they receive from the State or a former employee scheme.
Premiums can be high, but can be reduced if the policyholder opts for a lower specified level of income unrelated to normal earnings. Additionally, it is possible to choose to extend the deferment period between becoming disabled and starting to claim. This is normally four weeks, but can be voluntarily increased to anything from three months to a year.
With any form of PHI, it is vital to link the insured income you choose to retail price inflation, both during the period when you are insured and for the whole payment period. These are usually equal. Making this form of extra provision costs more, but will be worth its weight in gold in maintaining the real value of your disability income over a prolonged period.
It is important to look for a policy that offers a guaranteed premium throughout its life. Some insurers may offer cheaper policies with a 'reviewable premium', but you will have no control at all over how much premiums increase as the policyholder gets older. Similarly, you need to check the definition of eligibility to claim. The best definition is when the policyholder is unable to follow his or her own usual occupation (or an occupation suitable by training, education and experience). Any policy that only offers to pay out if the policyholder becomes unable to follow ANY occupation should be avoided.
CRITICAL ILLNESS INSURANCE
Critical illness insurance tends to be much cheaper than PHI. Unlike PHI, it pays a lump sum on diagnosis of certain specified illnesses: it does not pay the policyholder a regular income on disability. The specified illnesses usually include cancer, heart bypass surgery, kidney failure, stroke, heart attack and major organ transplant, although this list can be extended if you wish.
It is crucial to remember that, unless the policyholder's illness is on the list specified in the policy, they will not receive a penny: the relative cheapness of critical illness insurance has its price.
SUMMARY
There are many different ways in which you can provide for the security of yourself, your fellow directors or partners, or your employees should they be left unable to work for any reason. Making such provision can be costly, but will also yield benefits both in the recruitment and retention of staff, staff morale, and in terms of minimising time off work in the event of illness.
As with any form of optional corporate cover, you will have to make the final cost-benefit analysis on your own. However, our specialist business team at Focus is equipped to provide detailed advice on all aspects relating to the set-up, costs, levels of cover and administration of anything from pensions to death in service cover, PMI or income protection schemes. And because we are truly independent financial advisers, we can offer solutions from across the entire range of products for any given need.