MONEY MATTERS No operator in his right mind would
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MONEY MATTERS No operator in his right mind would fail to insure his vehicles, loads or premises, but many do without income protection cover. Is it a luxury, or a lifeline? We took a look under the covers...
Most people have made provision for their families in the event of their death, but a surprising number have no cover to pay their wages if they fall ill. The solution is something known as permanent health insurance (PHI), more generally known as income protection.
The annual cost of PHI for a 40-year-old man is generally 2-3% of the annual benefit cover. At age 30, the minimum rate drops to 1-2%, and at age 50 you could expect to pay up to 6%. Compared with the costs and benefits of Class 2 and Class 4 National Insurance, PHI begins to looks reasonable, and the benefit needed to maintain your level of income may be less than you think PHI is designed to assure your income should you fall ill; not to improve it. So the maximum benefit for which you can insure is 75% of your taxable annual earnings, less the single person's state invalidity pension, which is £2,816pa. For a married man, with two children and earning £20,000 gross a year, the total state benefit would be nearer £8,000, leaving only around £8,000 needed to restore income on a net-to-net basis.
The cost of PHI is affected not only by the company you choose, but by the kind of plan (level benefit or inflation linked); the period of deferment (the waiting period between becoming ill and the start of benefit payments); your occupation (higher premiums for more physically demanding or riskier jobs); your sex (premiums for women are typically loaded by up to 50%); and, most of all, your age.
To protect your standard of living you need some sort of inflation protection with the premiums, the cover and the benefits all rising in line with RPI or some other yardstick. This costs about half as much again as the level-benefit type; the exact increase is linked to the duration of the policy so it will be higher for a 20-year-old than a 50year-old. In between these extremes are variations in which the benefits are indexed, but only when being paid, and starting from the original level, with cover returning to the original level after benefit ceases.
Generally, for inflation-proofed premiums simply apply RPI (or a fixed percentage) to your initial rate. Some companies rate the annual increase in the premiums at your current, rather than your initial age, which makes for steeper increases as time passes.
Although inflation-proofing is in principle a good idea, there is a catch. If the chosen indexing outstrips your own earnings you could end up overinsured, so claiming benefit would increase your income. Some companies accept this and pay out, but others reduce the payouts to the income-replacement level (in some cases with a refund of the excess premiums).
If you think your income growth will outstrip inflation, consider policy options which allow a periodic update. Friends Provident, for example, offers increased cover of up to 30% every three years—but at an additional cost of 20% on the original premium plus the cost of the new cover.
Although contracts cannot be cancelled by the insurer, it is becoming increasingly hard to find premiums which are guaranteed not to rise, except by an agreed inflation-related formula, throughout the life of the contract.
Following losses on claims many companies now offer reviewable or renewable policies. Reviewable policies take into account the company's claims experience; changes in premium rates (usually every five years) are across-the-board. A renewable policy is in effect an invitation to the individual to sign up again at the higher rate appropriate to the his/her increased age. The invitation may be guaranteed, but the rates will be those "in force at the time".
Unit-linked policies may pay out a small cash dividend at the end of the policy, based on the company's overall fund performance and not on your individual claims record. This is really a marketing ploy and, given the unhappy experiences of several companies in the PHI field, not one that should overinfluence your decision. A much more important consideration is what companies will pay out for, and for how long.
Some will pay out if you are unable to follow your own occupation; others only if you cannot perform any job for which you are reasonably suited. Some policies "downgrade" you from one category to the other — or even to "any work" after you have been claiming for two years. It is also worth checking which illnesses are not covered.
Whether a medical examination is required before acceptance depends on the size of the sum assured and the age of the individual. Thresholds vary, but it should be possible for someone under 50 to insure £1, 000 a month.
As examples of the likely cost of PHI, here are two quotes for a 40-year-old man in a standard occupational category (office or professional) taking out a plan to age 65, with a three-month deferment. He is seeking £10,000-a-year cover with some form of inflation-protection. Zurich Life would charge £2227 a month, with increases linked to the retail price index. The premiums are reviewable, although not in the first five years of the plan. Friends Provident would charge £31.19 a month, with the additional benefit of immediate payment of benefit within the deferred period if you are in hospital for more than a week. Inflationproofing is at a regular 5% per annum. Its premiums are guaranteed.
But these figures are for a Class 1 (office or professional) job; fine if you're a transport manager but not if you're in the hands-on part of the industry. Class 2 jobs (typically retail and light industrial) hike premiums by as much as 50%. Some driving jobs fall into Class 3 where the loading is up to 60%. Class 4, which includes many building trades and ladder workers, could hit premiums by 70% (minimum six months' deferment with Zurich) or 120 % -plus (minimum three months' deferment with Friends Provident). It is not clear if "ladder work" includes drivers who have to climb over their vehicles. Loadings vary widely between insurers; so does the way occupations are classified. As always, it pays to read the fine print.
The companies mentioned here have a good track record in this sector, but they are quoted purely to give an idea of typical premiums. In seeking the right policy for your needs from the multitude of plans and options available, it would be wise to seek independent advice.
CI by Peter Willis OPERATORS' EXPERIENCE Surrey Council's Operational Services department owns three Discoveries: one is on contract hire to the Motorway Inspection unit and the other two to Bridge Inspection. Chris Kestle, the department's Customer Services Manager, says that they were chosen for their off-road ability, good visibility and comfort; they are used more or less as mobile offices. Equally important was the Discovery's good residual value even at high mileage; they have each covered 30,000 miles in 18 months with no problems. SOS, which also operates 15 Land Rovers, has now ordered another Discovery.
Avon Ambulance Service uses two Fronteras as Paramedic Rapid Response Units. Equipped with communications gear and racking for medical equipment, they can reach areas inaccessible to normal ambulances and serve as mobile command centres at major incidents. Chosen for value in terms of both purchase price and maintenance costs (over a sevenyear service life), the Fronteras have each covered 5-6,000 miles in a year. They are also used to ferry transplant organs, and proved their worth during the Hartcliffe disturbances of last year—they don't look like police vehicles.
Mike Burnside of Heritage Conservatories in Cirencester has covered 36,000 miles in his vee-six automatic = Shogun since last April. This is his third Shogun, after a diesel Discovery that suffered a series of mechanical failures. It is used hard on and off the road, often towing a 1.5-tonne tipping trailer along muddy unsurfaced lanes. Burnside generally uses two-wheel drive on the road, and considers that the Shogun handles better than the Discovery with the damping on its hardest setting. Mitsubishi's warranty is clearly a major factor for such a high-mileage user, and Burnside reports good back-up: his dealer readily fitted a switch to override the ABS for off-road use.