PHI Income Protection Insurance

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PHI INCOME PROTECTION INSURANCE - Typical Key Features

  • Designed to pay out Income to cover lost salary/wages not lump sum on accident or sickness
  • Usually has a waiting or deferred / waiting period from 1/4/8/13/26/52 weeks 
  • PHI benefits are currently paid out tax free on claim until you return to work or plan end date
  • Income Protection PHI wage cover can usually run upto age 65/70 
  • Income Insurance Benefits may be level or inflation linked 
  • Medical evidence is required to underwrite before any terms offered
  • Premiums may be none-reviewable, annually/5 yearly reviewable or age costed
  • Budget PHI salary cover may run upto age 65/70 but payout for only 12/24/60 months upon any claim
  • Cover may be based on maximum of say 50% to 65% of your gross earnings
  • If Self Employed eg; Dentists then terms usually based on last 12 months / average annual net profits
  • If a Director may also include dividends as well as PAYE income
  • Waiver of Premium (where the Insurer waives/protects & covers your premiums after a deferred period of 4/8/13/26 weeks due to sickness or accident) so you do not have to pay them in claim

     If you are an employee and you fall ill, your employer might pay you your full pay for a few weeks or months. By law, an employer currently must pay most employees statutory sick pay for up to 28 weeks, though this will probably be a lot less than your full earnings. After that, you would probably have to rely on state benefits. If you are self-employed, you won't have this option.

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Government benefits are very similar to unemployment insurance ie; probably insufficient and so most people would probably see a very substantial drop in their income if they were out of work, even for more than a few months because of illness or disability. 

 

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How does Income Protection PHI Insurance work ?

If you can't work because of illness or disability, an income protection plan (also called income protection insurance,  income protection cover, income protection life insurance, salary insurance, salaries insurance, wage insurance, wages insurance, earnings insurance, sick insurance, sickness insurance, income insurance phi, income life insurance, permanent health insurance or phi ) aims to pays out a tax-free income.

"PHI Income Insurance" tries to put you back into the same situation you were in before you were ill. But it does not allow you to be better off sick than well. So the maximum amount of income you can replace is the after-tax earnings you have lost, less an adjustment for any Uk State benefits you can possibly claim. 

If you are employed this means that dependant on the Insurer - 50%/65% of your gross income but then paid out tax free. If self employed then this is usually based on last 12 months annual net profits. Note that the old PHI Insurance rules used to be based on 75% of income but then taxable (so beware of swopping these old plans without advice). Different rules also apply for executive PHI, Keyman PHI or Group PHI with income cover providers.

However, some employers arrange group income insurance protection for their employees as a perk of their job, which can pay out an longer term sickpay income after the statutory sick period maybe upto 5 years eg; Commercial Airline Pilots. So check what you are entitled to.

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Example of working out how much PHI Income Protection cover you may need :

Gordon Brown is married & has 3 children and earns £26,000 a year before tax and other deductions. He works as an employed Optician and estimates that, if he was ill for a long time, his budget would be affected as shown in the example table below.

Gordon budget calculations in the event that he couldn't work 

# Estimates of Income he would lose
# Take-home pay £18,000
# Deduct income he would gain
# Approximate long term incapacity benefit £4,000
# Deduct expenses he would save
# Work related costs, mortgage interest payments if covered by mortgage payment protection insurance £3,000
# Add extra expenses he would pay
# Allowance for, say, cost of special equipment or treatment, cost of heating your home for more time £2,000

EXTRA INCOME NEEDED £13,000

So Gordon reckons he would need an income protection plan for around £13,000 a year to maintain his lifestyle. This is 50% of his before tax pay of £26,000.

Gordon also works out that as a perk of his job, his employer will pay him 50% of salary for just 8 weeks. Gordon therefore arranges for his income protection policy to pay out after this period of incapacity, until proposed retirement, index linked & with premiums waived by the insurer upon claim.

So tell me more about Permanent Health Insurance (PHI)

Obesity & Insurance - PHI advice

PHI Insurance - Underwriting & Health Issues 

You pay a monthly premium throughout the term of the "Income Insurance" policy. Cost depends mainly on:

# Your age - at the time you start the policy. Older people are more likely to suffer an illness, so pay more.
# Your sex - gender no longer affects rates wef 1/2013 via income providers.
# Your health - at the time you start the policy. If you have existing health problems you might be refused cover or have to pay more.
# Your Occupation - some jobs are more likely than others to contribute towards illness. For example, a Solicitor is deemed to have a lower risk free job (but a deep sea diver runs high risks and so would have to pay more).
# Hobbies and lifestyle - for example, rock climbing is high risk, so you'll pay more.
# Smoker Status - for example, smoking makes you more likely to make a claim, so you'll pay more than a none smoker.
# Waiting period - once you claim, there is a delay before payments start. You can choose how long this is - for example, from 4/8/13/26/52 weeks up to 104 weeks usually dependant upon occupation. The longer the waiting period, the less you pay. 

If your health is poor or your lifestyle is considered risky, you may be refused PHI cover or have to pay more than normal.
 

PHI Insurance - Own Occupation or Any Occupation Basis  ?

Check whether you already have protection in place in case you get incapacitated, and for how long that protection would last. For example your employer may have an Income Insurance scheme in place you can benefit from, or you may have a payment protection insurance that covers your mortgage.

Check whether the policy reduces what it pays out if you receive state benefits or claims monies under any other insurance policy

Normally the best terms are simply if you can't do your normal job "own Occupation" as a say a Vet

Some income protection policies only pay out if you can't do any work, but you would have to be seriously incapacitated for you not to be able to work at all. Others cover being unable to do any work for which are "Suited Tasks" similar to being say a Pharmacist.


Most PHI policies would pay out until your reach age 65 or when you have chosen the cover to end. Does the cover increase in line with inflation?
Check how different occupations are treated such as chiropractors. Different Uk Income Protection Providers put the same job in different risk categories.

 

Why not just take out Critical Illness Cover instead of PHI Insurance ?

Critical illness cover (CIC) - pays out a tax-free lump sum if you are diagnosed with a life-threatening condition for example some forms of cancer, heart attack, stroke, diabetes etc; as specified and listed in the policy - is a possible cheaper and simpler alternative to Income Insurance.

But there are lots of common situations when CIC would not pay out - for example, if you had back problems or maybe a stress-related illness from your job as an Accountant. Additionally, not all occurrences of the critical illnesses listed are covered, for example some lesser forms / early stages of cancer maybe not covered. Ideally you should have both plans if your budget allows this. For more information on this & costs talk to a professional broker here.

Is PHI Income Insurance the same as ASU Cover ?

Accident, Sickness & Unemployment insurance (ASU), can also be referred to confusingly as Income Protection, if doing research online, although it is a different product. ASU cover will provide you with an income to meet your outgoings if you are off work sick, have an accident or are made redundant. It pays out a monthly benefit to cover your mortgage/loan and other related costs but for a limited period.

You may choose the amount of benefit you would like to receive - although there are some limits on the maximum amount. The premium will be a percentage of the amount of monthly benefit you would like to receive. NOTE: Benefits are usually payable for a maximum of 12 or 24 months - unlike Income Insurance PHI which may pay up to when you retire usually age 65.

Some policies will also allow you to choose whether you want to receive benefits for accident and sickness only, unemployment only or all three. Most policies will also have a 'deferment period' usually 30 days. This is the period of time you will have to wait after losing your source of income which is harder being maybe self employed until you may claim the policy benefit.

 

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This website is intended for UK consumers & any information contained therein is for Generic Guidance only and is not to be construed as advice. For protection products we usually offer from a range of providers. For products with an investment element we will introduce you to an authorised adviser. We may also introduce you to other selected professional partners for other protection or legal products as deemed appropriate. Online Dispute Resolution (ODR) - https://webgate.ec.europa.eu/odr/main/index.cfm?event=main.home.chooseLanguage. Financial Ombudsman. http://www.financial-ombudsman.org.uk We nominate to fundraise for Great Ormond Street Hospital Charity.

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