Ensure the bills can be paid should a serious illness strike

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More adults insure their pets than their income in case of ill health.

These amazing statistics from research by Scottish Widows – 15 per cent to seven per cent respectively – certainly show how caring we are to our household animals but how few have thought through the disastrous effects a serious illness would have on their finances.

Although over half the population (54 per cent) review their finances once or twice a year and awareness of income protection insurance is high (83 per cent), the take-up is incredibly low.

Anyone who is off sick for more than a few weeks can worry, particularly if they have few savings, or a partner’s income to fall back on. In the longer term, your lifestyle could be at risk.

For the self-employed and those on limited employment contracts, income protection cover is vital. It provides a monthly income to help pay the bills and prevent you getting into debt, which is a real worry for those who cannot work as a result of an accident or long-term sickness.

Protection insurance should be compulsory, say PruProtect. Its CEO, Herschel Mayers, says the industry should lobby for its compulsion.

With unemployment rising to its highest level for 17 years, fears of a double-dip recession and alarmist language by the Governor of the Bank of England that the current crisis could well surpass the Depression of the 1930s, it’s a brave adult under retirement age who does not take out income protection.

Start by looking at your employment contract to see what entitlement would be paid in the event of redundancy or being unable to work through accident or sickness.

Work out regular financial commitments, such as rent or mortgage payments, car and child care costs, school fees, utility services, food and transport. How long would your piggy bank last for? Ideally everyone would hold around six months’ salary in savings as a buffer but few can build up such a readily accessible reserve.

Income protection policies vary on how soon benefits are paid. The longer the ‘deferment’ period, the lower the premium with typical periods offered from 13, 26 and 52 weeks.

Do not rely on benefits. Whilst the Government will pay the interest on a mortgage, it will not pay out the full repayment and associated costs. According to the National Audit Office in a report in May, the Mortgage Rescue Scheme helped fewer than half the number of people avoid repossession than originally planned. Since its launch in January 2009, it has helped 2,600.

Leading independent insurance consultant, Kevin Carr, says that the most important factor when deciding which income protection policy to take is not the price but the occupation definition. This means how ill do you need to be to make a claim.

There are five occupational definitions for payment to be made:

n ‘own’ – unable to undertake your own occupation;

n ‘own or suited’ – unable to undertake your own or suited occupation;

n ‘suited’ – unable to undertake a suited occupation;

n ‘any’ – unable to undertake any occupation;

n ‘ADL/ADW’ – unable to undertake ‘activities of daily living’ or ‘activities of daily work’.

Opt ideally for the first and consider the second but no others as claiming can be difficult. ‘Suited’ means an occupation that could be undertaken based on your training, education or experience. Give as accurate a job title as possible and clear breakdown on your work activity.

Be honest when disclosing medical history. The largest reason for declining claims is for non-disclosure. If unsure whether to mention some medical aspect, reveal it as telephone interviewers are usually trained nurses. Don’t be worried about medical exclusions or loadings. They are usually only placed on a policy where there is a history of a specific on-going illness or where the occupation could lead to an increased risk from an existing illness.

With the risk that some key item will be omitted which could later invalidate a claim, consult an independent financial adviser with experience in this field. Opt for a policy which allows cover to be increased. Good ones will permit an annual increase in line with RPI up to 10 per cent. This ensures your benefits increase in line with inflation.

The most distinctive scheme to provide income protection is named after its founder, George Holloway, who became MP for Stroud in 1886. Holloway policies are offered by several friendly societies.

As they are member-owned organisations with no shareholders, they are able to pay a tax-free cash sum at the chosen retirement age regardless of how many times you may have claimed.

Other income protection providers pay nothing to non-claimants.

Holloway Friendly will cover up to half gross annual earnings, paying a maximum £500 a week (minimum £50) under its Classic Plus Plan with any retirement age between 50-65 years although some occupations have specified dates (dentist 55, fireman 50, HGV driver 60).

Cirencester Friendly will pay up to 60 per cent of pre-tax earnings (or pre-tax profits for self-employed). Its annual limits are £2,730 (minimum) to £40,950 (initial maximum).

Premiums at Shepherds Friendly start from £10 monthly with choices available on level of income (up to 60 per cent) and deferment time (one day to 52 weeks). The maximum annual benefit at the start of a plan is £42,000.

It is not necessary to be employed to obtain cover. Wiltshire Friendly, for instance, accepts homemakers and students up to £60 a week.

This aspect should be considered for all adults in the family. Its members’ funds exceed £9.5m.

Whilst friendly society premiums may be higher than non-mutuals, apart from the pay-out on retirement, they usually make no higher rate for occupation, smokers, gender or hazardous pursuits. Often increases only apply when the height/weight ratios fall outside the standard range.

Whilst policy details should be compared in detail, as an indication of monthly premium, taking a non-smoker administration clerk with a level weekly benefit of £250 deferred for 26 weeks who will retire at 60 years, rates for a 39-year-old male range from £14.07 (Unum) to £42.15 (Exeter Family Holloway contract).

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