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Risk manage

24th October 2002
Page 44
Page 44, 24th October 2002 — Risk manage
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Which of the following most accurately describes the problem?

Afamily's only provider with a wife, children and a large mortgage suffers a debilitating illness and is unlikely to work again. He may lose his income, his job and consequently his mortgaged house. It is a nighttime scenario. Yet surprisingly few people have insurance that could protect them from such a catastrophe. Permanent health insurance, which is now often called 'income protection' or 'income replacement cover', provides an income if the policyholder cannot work because of illness or injury.

The payments usually start after 13 or 26 weeks—this is because an employer often gives full pay for 13 weeks and half pay for the next 13.

Then the salary is frequently withdrawn and the employee is effectively dismissed.

The insurance usually pays so% of earnings tax-free. Some older policies pay 75% minus the state benefit, but these are rare. The payouts continue for as long as the employee is unable to work up to the retirement age of 6o or 65.

Measly pension

However, even though the insurance produces a reasonable monthly cheque up to retirement, the insured person may get only a measly pension if contributions are missed. So for an extra amount the policy will cover pension payments, including the employer's contributions, Permanent health insurance payments give a reasonable income if the beneficiary has low commitments, but for those with hefty mortgage payments and other debts it is worth taking out critical illness cover in tandem with permanent health insurance, Critical illness cover comes into effect if the insured person is diagnosed with one of a number of serious illnesses, including cancer, stroke and heart disease. The payment is a tax-free lump sum, often Itoo,000, giving an immediate interim income.

It is best to organise these insurances even before you put your pension in place.

Employers often seem reluctant to provide permanent health insurance, but some group = policies are competitively priced, says Kevin Morgan, MD of EZI UK, an independent financial advice company in Hitchin, Herts.

Morgan believes take-up is low partly because of the misleading name "permanent health § insurance" (he suggests "protection" or "income replacement" instead). But the Association of British Insurers reports an it% increase in takeup last year, and research specialist Mintel predicts 7°/.3 growth in the next three years. "We think it will grow faster through independent financial advisers," says Mike Turner, Friends Provident's protection product manager.

Morgan is optimistic: " lf you can get in front of the decision-makers and point out the advantages they are quite interested," he says. "Consider staff shortages. For employers prepared to go the extra half-yard to give this benefit for very little cost it is a plus point It is a staff recruiting and retention tool and it won't cost the proverbial arm and a leg."

Owner-drivers

This cover is equally important for anyone outside the company structure owner-drivers and small family firms can be devastated by an inability to work.

Always check that the benefit will be paid if the insured person becomes unfit to pursue his or her own occupation or profession. Some policies stipulate that the holder must be incapacitated for any work. A driver with heart problems, for example. might be refused payment because they are capable of a desk job.

Although consultants and brokers can usually find a reasonable deal, finding the right cover can be tricky, says Peter Earle of Holden Meehan, a London-based financial adviser: "Yr are more likely to be off sick for long perio■ than to die, and this causes difficulties, Son people are not going to be accepted."

For example, builders are considered to be a high-risk category, along with anybody who job involves heavy physical activity or working heights, and people in high-stress occupatior Premiums vary, but as a rough guide: • A 4o-year-old non-smoking truck drivo earning 125,000 a year would pay/76 a mon with a retirement age of 6o, or iro8 a mon with retirement age of Gs. He is in a fairly hig risk group: he might be unable to work for yea because of a bad back, or a fall from his ci could put him off the road with a broken leg.

• A 4o-year-old non-smoking transport ma ager earning /40,000 a year would pay month with a retirement age of Go, or /34 month with a retirement age of 65. If he hk bad back he might struggle in to work when driver could not.

Both calculations are based on payouts all 26 weeks; for payouts after 13 weeks add abo 20%. Premiums are generally lower f younger applicants and slightly higher when ti retirement age of 65 is chosen, though the d ference between Go and 65 is more noticeat when a person starts paying in at so-plus.

• by Brian Cacti


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