Permanent Health Insurance (PHI)
The Permanent Health Insurance (PHI) contract is designed to produce an income for people unable to work due to ill health from any cause. This scenario is much more common than most people realise, and a lot of people who have a problem get a serious shock when they find how little money they have to live on.
State benefits are sod all, and if you are employed you should find out where your employer stands.
; He may have a policy that will pay out for you.
; He may have a house rule of 6 months pay.
; If there is a pension scheme you might have benefits from it, ( get them quantified, and
remember to check your salary definition, esp. if you get commission, bonus, or
; There may be no formal system in place at all, and it is at his discretion.
; They may sack you on the spot or simply give you the usual months notice. Remember that at the end of the day , no matter how much he may want to support you , your employer is going to have to stop your salary at some stage simply because he won't be able to carry you. Find out where you stand.
An income, which can be inflation protected, until retirement. You can normally insure up to 50-65%* of your gross income, (this varies from provider to provider).
Note, if you are arranging your OWN PHI policy, and are not going to be covered by a group scheme then in the event of a claim your income will be tax free. The policy will normally pay out some time after the date at which you stopped working. The shorter this period, the greater the premium. Most people opt for three months, six months or twelve months, according to their position. (Clearly if your employer will pay for six months you don't need the policy to pay out before this). The premium depend on age, occupation, and will normally exclude pre existing conditions.
Watch for the definition of disability. Normally an " own occupation" basis it can be, ( esp. for those in risky jobs, or for whom a small problem
can be a disaster), " own or any ", which means that they can take a very tough view of any claim.
Also be aware that many policies are reviewable. This means that if the overall claims, ( not your individual ones, but those of all policyholders ) , are greater than expected they can increase the premiums across the board to all policy holders.
This means that companies can try to buy business with low premiums, only to increase them in later years. Because of this hazard the cheapest quote may not be the best. What you need is "own occupation" from an insurer who has had long experience in the PHI arena.
* If your PHI is arranged by your employer under a group scheme then benefits ARE taxable. However you can be covered for up to 75% of income. Insurance: Critical Illness
Critical illness insurance pays out a lump sum if you suffer from one of a range of specified health problems.
Although critical illness insurance is sold by life assurers, it actually has nothing in common with life insurance. For a start, you don't have
to die to benefit from the critical illness insurance policy. This insurance is designed to pay out a (tax-free) lump sum in the event of you suffering from a serious illness or if you have to undergo certain types of surgery.
The lump sum paid out by the critical illness insurance is to help with the extra costs of living with a particular condition but it's important to note that it only pays out if you contract one of a defined list of illnesses. In other words, if your illness isn't on the list, you won't get a penny.
More than 75% of all critical illness claims are for cancer, coronary artery bypass surgery, heart attack, kidney failure, organ transplants and stroke and these core illnesses are usually on the list. If you want other illnesses to be added, you'll pay more.
Unless you have substantial savings (or other sources of income), some form of critical illness insurance may well make sense for you. How much you should have depends on your circumstances. Consider the lump sums that
you might need to make in the event of contracting a serious illness; being able to pay off the mortgage, for example, or to make modifications to your home. If you're able to cover the necessary lump sums from your own or your partner's savings, then critical illness insurance may well be
income unnecessary and it may be more appropriate to concentrate on protection.
However, assuming you do want critical illness cover, you'll not be surprised to hear that there is a wide range of policies available. The size of your insurance premium will depend on your age, sex, health, occupation, whether or not you smoke, the type of cover you need, and how long you need it for. Bear in mind you'll have to pay more if one of the core illnesses happens to run in the family. The best thing is to keep it simple.
Usually you'll pay a set premium for a set amount of time but some are flexible, so that you can increase the level of critical illness cover as you go. On the whole, though, as with life insurance, if you are doing a proper job of saving, you are likely to want your level of cover to be reducing rather than increasing. You don't want to be paying for something you don't need.
Joint critical illness cover
It is also possible to get policies which cover different people. You could have a joint policy with your spouse, but be careful with the small print; a policy might only pay out for the first of you to become critically ill. If you want cover for one of you, then you probably want it for each of you. You can also have policies that automatically cover your children when they reach a certain age. If you want this, make sure that your policy has it clicking in just as and when you want it to. As always, read the small print.
Combined critical illness and life insurance policies Often you will find critical illness policies which are bundled in with a life insurance policy. There is nothing necessarily wrong with this, even though it doesn't really follow the 'keep it simple' approach. However, if you go for one of these, make sure that it covers exactly what you want it to. You might find that a bundled product is cheaper than two
individual ones but it might mean that the bundled policy only pays out once. So, if you contracted a serious illness and then died after two months, you (or rather your dependants) would find that a bundled policy, having paid out for the illness, does not pay out on your death. Separate policies would, of course, pay out for both and are probably preferable. Total and permanent disability cover
Many critical illness insurance policies will also include cover for 'total and permanent disability'. This pays out if you become unable to work due to permanent disability arising from any illness or injury (regardless of whether it is listed in the policy).
Whether or not it is a good idea to include one of these clauses is
with income protection insurance. debatable. Effectively it overlaps
However there are small differences. First of all, critical illness insurance pays out a lump sum whereas income protection, would you believe, pays an income. Would you rather pay off your mortgage or be given the income to pay the premiums? Probably the former. However, income protection insurance has one big advantage. It pays out for as long as you're off work (after a brief initial deferred period). You don't need to be permanently disabled, just unable to work. It is therefore possible that income protection will match your requirements better than a total and permanent disability clause in a critical illness policy. Insurance: Income Protection
Income protection insurance pays you a regular income if you are unable to work.
Income protection insurance is designed to pay out whatever the reason for your being unable to work (subject to one or two exclusions). In this respect it differs from a similar product called critical illness
insurance which only pays out if you contract one of a list of specified illnesses (even if the list is pretty long). Income protection insurance also just pays out steadily over the period that you are unable to work, as opposed to critical illness insurance, which generally pays a straight lump sum.
Income protection cover is also not to be confused with life insurance,
which pays a lump sum to dependants on your death.
It obviously depends on your own circumstances whether income protection insurance is necessary. If you decide an income protection policy is right for you, you'll face some big obstacles. There are all sorts of different policies with small variations that could mean the difference between being able to claim in full and getting nothing.
Just to confuse you even more, income protection comes under many different names. You might hear it called 'permanent health insurance', 'income replacement insurance', 'long-term disability insurance' or a few other things. However, they all do the same basic job, which is to pay you an income if you become unable to work due to sickness or injury. If you are self-employed, you really ought to buy this sort of income
insurance, although you may find it is very expensive. But if protection
you're employed in the usual way then, before you go any further, check your employment contract to see whether your company automatically pays you if you are off sick for weeks or months.
As with all insurance, the trick to buying the right type of income protection cover is to consider exactly what it is that you need it to do for you. In other words, you need to have a very close look at the small print of any policy to make sure it will pay out when you want it to. There are three main definitions of being unable to work:
; unable to do your own job;
; unable to do your own job or a similar one for which you are qualified;
; unable to do any kind of paid work.
You need to decide whether you'd be prepared to do another, perhaps less pleasant, job if you became unable to do your current one. If so, you reduce the likelihood of needing to make a claim and the income protection insurance premiums should be that much lower. If you wouldn't want to have to find just any old job, the middle ground would be to go for 'unable to do your own job or a similar one for which you are qualified'. However, if you are unable to do your current job, you're also unlikely to be able to do a similar job. So, the difference in insurance premiums might not be that great and you might think it worth going for the simple 'unable to do your own job' definition. After all, if you buy an income protection policy with an 'any occupation' clause it means that a solicitor who is confined to a wheelchair and can't move her hands would have to accept any job - for example, as a telephonist, on a much reduced salary. The policy would not pay out unless you were unable to do anything.
When you start shopping for your own income protection insurance policy, look for one with fixed premiums. A guaranteed policy will mean you pay the same price each month for the rest of your working life. An increasing number of deals want you to pay more each year (in line with your age and the company's claims record). It's tempting because the payments tend to be lower to begin with, but you should resist. Fools have to be strong! You can save quite a bit by buying an income protection policy that makes you wait for your first payout. Delaying payments for 60 or 90 days after you first make the claim will save you money. The longer you can afford to hold out, the cheaper it will be for you. If you can squirrel away some money and actually survive a longer waiting period, your savings will build up over time. If you don't need to claim, you get the benefit of this extra cash; don't put more than the bare minimum into the insurance company's coffers.
You should check any income protection insurance policy to see what is excluded from it. A typical list of exclusions might be as follows:
; disability due to, or caused by, HIV/AIDS;
; normal pregnancy;
; self-inflicted injury;
; criminal acts; and
; misuse of alcohol and/or drugs.
So, if you consider yourself at particular risk from any of these things, then you might need to do a bit of shopping around to find a suitable income protection policy.
Loans: Unsecured Loans
Unsecured loans are often the most cost effective way of borrowing money for a few years.
Whether you call it an unsecured loan or a personal loan, they are both
exactly the same thing. It means you can borrow money without giving your lender security against it if you are unable to repay it - for example, your home or your car. As a result you are unlikely to lose your home or your car if you can't keep up with your loan repayments.
In the past rates were generally higher than secured loans but rates have dropped recently to the extent that some personal loan rates now rival standard mortgage rates.
However, lenders calculate interest rates in different ways so it's important to check how much a loan will cost you in actual pounds and pence. Don't just look for a low Annual Percentage Rate (APR) - find out the Total Amount Repayable (TAR) as well. The latter will tell you the true cost of your borrowing.
One good thing about an unsecured loans is that the interest rate tends to be fixed for the duration of the loan, so at least you can be certain that your monthly repayments won't change, even if interest rates were to rise.
While unsecured loans are 'safer' than secured loans if you default, be aware that, particularly if the loan is a large one, creditors are increasingly using a little known procedure to get their money back. If you own your own home or other valuable assets, creditors can apply to the court for what's known as a Charging Order. If granted, your unsecured
loan can be turned into a secured loan, thereby putting your property at risk as it means the creditor can then go down the route of forcing a sale to get their money back.
Loans: Secured Loans
Secured loans are an expensive way of borrowing money and are best thought of as a last resort.
As with a mortgage, secured loans enable you to borrow fairly cheaply by putting your home or some other asset up as security. You can also borrow more than you might be able to with an unsecured loan although if borrowing large sums of money you may be better off remortgaging as you may be able to get a better deal.
However, as the warning goes, "Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it", so don't go down this route unless you're absolutely certain that you can comfortably afford the monthly outlay. The roof over your head really is at risk if you fall behind on your repayments - a homeowner loan is effectively a second mortgages but, usually, with marginally higher interest rates. Make no bones about it, should you default on a secured loan, the creditor is entitled to force the sale of your home to get their money back. Your mortgage lender, if you have a mortgage, will be paid first, followed by the secured loan creditor.
There are other major drawbacks with borrowing against your home. For a start you tend to pay off your debt over a much longer time frame. Indeed it may even run alongside your mortgage for the length of the term. Repaying a secured loan over a 20 or 25-year period ramps up your overall interest bill, so smart borrowers will organise a secured loan over as short a period as possible, in order to keep the overall cost to a minimum. Interest rates also tend to be variable so they can go up or down at any time - somewhat of a risk for a borrower on a tight budget. Usually there is also an additional fee for arranging a homeowner loan because, for example, the Land Registry needs to be notified that you've borrowed against your property. And if you repay your loan early there may be very high penalties.