Permanent Health Insurance

The financial consequences should you suffer an injury or illness which caused you to be unable to work may be extremely serious. Although your employer (if applicable) or the state may provide benefits for a limited period, this may not be sufficient to maintain a sufficient standard of living and may not be guaranteed. The state pays benefits if you are unable to work through sickness or disability, however, these benefits have been considerably reduced since 1995. Benefits are now taxable and there is a new stricter system for deciding who is able to claim. Additional benefits including Income Support are only paid if you have a very low income.

Payment of Benefits

A Permanent Health Insurance (PHI) policy provides a regular income in the event of the insured being unable to work longer term due to illness or accident. The income is paid after a certain pre-selected waiting or deferred period and continues until either you return to work, or reach a pre-selected age (usually 50,55,60 or 65). The longer the deferred period the cheaper the policy. Benefits paid are presently free of tax.

Prior to the 1995 Budget the maximum PHI benefits allowed was 75% of pre-disability earnings less any state or company benefits. In order to prevent over insurance in the light of these changes, insurers are reducing these limits to around 50%.

Definition of cover

The exact wording of the definition of cover varies from one Life Office to the next, but they can be placed in one of the three groups.

1. The policyholder is unable to follow his or her normal occupation and is not following any other.
2. The policyholder is unable to follow his or her occupatio, or any other reasonably suited to his/her by training, education or experience, and is not following another.
3. The policyholder is unable to follow any occupation.

Basis of premium

Most PHI policies are not designed as investment products and therefore do not provide any return at maturity or when the policy lapses. However, although usually there is no investment content this does not mean that the premiums are guaranteed. PHI contracts can be categorised, in general terms, as either guaranteed, reviewable, or unit linked and reviewable. Based on our discussions I have recommended a guaranteed plan, where the premium and benefit are guaranteed not to change.

Occupational loadings

Most life insurers classify prospective policyholders into four occupational classes which take into account the likelihood of the prospective policyholder claiming.

These are summarized below:

• Class 1 - Non Manual Occupations: Accountant, Clerk, Draughtsman, Doctor, Secretary
• Class 2 - Light Manual Duties: Car Salesman, Chef, Hairdresser, Lab Technician
• Class 3 - Skilled/Semi-skilled jobs with emphasis on manual duties: Baker, Farmer
• Class 4 - Heavy Manual Duties: Electrician, Driver, Metal Worker, Window Cleaner

Some occupations may be declined.

This type of policy offers many advantages:

• Your income will be protected should you become disabled through illness or accident
• Your standard of living will be protected until the selected date

It is essential that you take professional advice prior to proceeding with any of the solutions outlined within the guides.

These guides do not provide individual tailored investment advice and are for guidance only. You should not act independently on the areas covered here but should seek professional independent financial advice. These guides represent our understanding of law and HM Revenue & Customs practice as at the date of publication. We cannot assume legal responsibility for any errors or omissions they might contain. Levels and bases of, and reliefs from taxation are currently those applying or proposed and are subject to change; their value depends on individual circumstances of the investor.