PHI INCOME PROTECTION INSURANCE - Typical Key Features
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.
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.
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.
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.
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
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)
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.
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.
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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