Permanent Health Insurance (PHI) is an insurance policy designed to pay you a monthly amount if you are unable to work due to illness, injury or disability.
The plan can continue to payout either until you are well enough to return to work or you reach the end of the policy life.
If you are unable to work as a result of accident or sickness a permanent health insurance policy would payout a monthly benefit to replace a proportion of your lost earnings.
Providing long-term protection
The plan would start to payout after your chosen deferred period (sometimes known as a waiting period) and would continue to do so either until you are fit for work or your reach the termination age of the policy, which is usually set at your planned retirement age.
This section sets out the various options you have when setting up your policy. Some choices you make can have a large impact on the premiums quoted so it is really worth reading this section before comparing insurers.
Level of cover
It really makes sense to review your expenditure to see how much you need to cover. It is obviously important to ensure you have all the essential outgoings covered, such as your rent/mortgage payments, utility bills, groceries and any debt repayments.
Please note that insurers have different limits as to how much you can cover as a proportion of your income, which ranges from 50% of gross (taxable) income with most insurers, right up to 65% of salary with a small number of other insurers.
If you decide to cover more than 55% of earnings you'll exclude a large number of insurers from providing quotes and potentially end up with uncompetitive premiums for a small additional amount of extra cover.
The deferred period is the length of time you would need to be out of work due to illness or injury before the policy would kick-in and start paying out a monthly benefit. Insurers usually offer deferred periods of 4 weeks, 8 weeks, 13 weeks, 26 weeks and 52 weeks, however a very limited number of insurers will even offer a deferred period as short as 7 days.
When setting your deferred period it is important to really think hard about how long you would realistically be able to last without an income before you definitely needed the policy kick-in. Factors to consider are full sick pay entitlement form your employer (if provided), savings and whether you have a partner who works.
It is very common to want to set the deferred period at 4 weeks, especially for the self-employed, it is just important to note that this option makes a huge difference to the premiums. For example, it is generally the case that if you increase the deferred period from 4 weeks to 13 weeks, the monthly premiums can come down by 40% to 50%, depending on the insurer.
Given the length of the policy term it makes sense to consider including the Retail Price Index (RPI) inflation linking option so that the real value of your cover remains unchanged over time.
With this option both the monthly benefit and premiums would rise each year in line with rises in the Retail Price Index (RPI) measure of inflation (as published by the Bank of England).
If this option is selected Drewberry Insurance try to use insurers that would increase both the benefit covered and the premiums charged one-for-one with inflation. It is important to note that some insurers would price the additional amount of cover based on your age at the time, meaning that the premiums would rise faster than your benefit.
There is sometimes confusion as to the difference between PHI and Income Protection Insurance (IP), which this section should clear up.
Change of Name
Permanent health insurance is now officially called income protection insurance, so the only difference between the two policies is in the name.
However, care needs to be taken when researching this type of cover because payment protection plans are often marketed in the income protection bracket (often called income payment protection), and these two policies are very different.
Not payment protection
Payment protection plans can usually only payout for up to 12 months and are therefore far less comprehensive than a permanent health policy as more serious, longer lasting, medical conditions wouldn't be covered fully.
Payment protection policies usually only provide cover in a suited occupation rather than using the 'own occupation' definition of incapacity, which means that the plan wouldn't actually cover you in your own specific job role, but rather a general role given your skills, experience and education.
Yes, permanent health insurance is available for both the self-employed and for directors of limited companies (please follow the links for more specific information).
For the self-employed it is important to note that cover needs to be based upon profit before tax (which is classed by insurers as your gross (taxable) earnings) rather than the revenue generated by yourself.
For directors of companies the insurer will consider your salary and dividends (provided that dividends are paid out for profits).
When arranging permanent health cover it is usually best to run through with an independent adviser, such as Drewberry. Not only will an adviser be able to ensure cover is set-up correctly but will also know all the nuances in insurer pricing to ensure you get the best rates for your protection.