The cost to employers of providing life and critical illness insurance, and income protection insurance, in their employee benefits packages looks set to rise steadily over the next two years, according to a new survey by Aon Consulting.

The costs of life and critical illness cover have fallen over 2008/09 but only 12% of those insurers surveyed by Aon expected to be able to lower the cost of their lump sum life insurance cover this year – compared with 50% who expected to be able to lower their premiums last year.

Looking specifically at critical illness insurance, Aon found that not a single insurer expects the cost of critical illness insurance to fall in the short term, while 29% are expecting to raise their costs.

For death in service pensions the situation was similar, with 29% of insurers predicting they would have to increase their rates.

Income protection insurance produced the most emphatic response of all, with 50% of insurers surveyed saying they would certainly have to increase their rates.

The situation is unlikely to improve as insurers move towards 2012, when the introduction of the Brussels-driven Solvency II initiative will force insurance companies to increase their cash reserves. Solvency II has been passed in order to strengthen the general standards of capital adequacy, and provide a more stable business environment for all European buyers of life and critical illness insurance, and income protection insurance products.

“Employers and employees have had a relatively good ride recently, with the cost of some of the most basic employee perks decreasing. However, this year we are seeing more consensus amongst insurers that costs are likely to increase,” said Paul White, head of risk benefits consulting at Aon.

Aon Consulting’s annual survey of insurers and reinsurers covered companies with a combined group risk market of £1.5bn.

Over three-quarters of UK workers would return to work before they had fully recovered from a serious injury or illness, due to concern for their income and the well-being of their families, according to new research published this week by personal insurances specialist Aviva. Despite this, uptake of income protection insurance is still low, with a national income protection gap estimated at £19bn.

Of those surveyed, 68% listed family finances as their major concern when on sickness leave, and 29% listed their mortgage payments as their primary issue within that. For 11% of those surveyed, a return to work before they had fully recovered would be driven by a fear of losing their job.

The survey also revealed that 79% of employees believe they could not get by on less than half their full salary, if they were forced to do so by a prolonged leave of  absence. Only 40% of companies undertake to provide half salary or higher payments to staff on long-term absence, Aviva added.

“The disturbing findings in our survey highlight just how poorly equipped to survive a period of long term absence many of us are and how this can lead us to make decisions we might live to regret,” said an Aviva spokesperson.

“The irony is that by taking out income protection – which pays a regular tax free income should you be unable to work due to illness or personal injury – families could easily be spared from may of the hardships of long term absence.”

The probability of the individual worker finding themselves incapacitated by illness or injury is relatively high, Aviva said, again highlighting the need to factor temporary loss of income into our financial planning.

In 2009, there were over 2.4m people aged 18-64 in the UK claiming incapacity benefit. Of those, over 80% were claiming for over six months, and 40% were claiming for more than 5 years.

When a business entity, whether a partnership, a self-employed sole trader or a limited company - has a key employee who falls ill or dies, life insurance cover and critical illness insurance can protect the company from loss of profits, and potentially protect the company from its creditors. Here are some examples of how insurance can be deployed as an effective ‘financial security measure’ by business owners.

Using personal insurance to protect the self-employed: When a self-employed person falls ill, they may lose their income due to their inability to work. An income protection policy can provide an ongoing ‘mini-salary’, usually equivalent to half your normal income, and paid tax-free, regardless of any other benefits you may receive. An income protection policy normally kicks in a few weeks after you give up work (you have to live on your savings during this initial  ’deferred period’) and can have an agreed term, covering you for up to two years, for example, or even running until you retire, depending on the policy you choose.

Using personal insurance for loan repayment: If a company takes out a loan, a director may be asked for a personal guarantee that the loan will be repaid. In the event of the director’s death, this could mean that the bank could call in the loan, potentially harming the business. Life insurance cover paid by the company to insure the director’s life for the amount of the loan would protect the company from this eventuality.

Using personal insurance in a partnership: In a partnership situation, it is wise for each partner to take out both a critical illness insurance policy and life insurance cover. If one partner is struck down by a heart attack or stroke and can no longer work, the critical illness payout can enable the other partners to buy him out, without delving into the partnership’s reserves. An agreement might stipulate that if the auditor’s valuation of the partner’s share exceeds the policy payout, the balance can be paid in 4 x 6-monthly instalments. If the policy proceeds exceed the value of the partner’s share, the excess is payable to the partner or his family.

If a partner dies, his life policy, written in trust and payable to the other partners, could enable the other partners to purchase his share of the business from his family, again with minimum impact on the partnership’s financials in that year.

Income protection insurance policies by Aviva will now offer more focused cover for highly skilled workers, providing a clearer and narrower definition of events which qualify for a payout.

Highly skilled medical and other professionals may now choose to buy income protection cover for losing the ability to do their “own occupation”, rather than being covered only for the eventuality of losing their ability to do a “suited occupation”.

“Suited occupation” cover in income protection insurance meant that a surgeon who injures a finger or hand, affecting or ending their ability to operate, would not receive a payout, as they would still be able to work in a related (‘suited’) occupation, such as a surgical consultant.

Now, Aviva can provide the surgeon with ‘own occupation’ cover, so that the income protection policy would pay out for the loss of the ability to perform operations.

“Own occupation” cover is up to 70% more expensive than the broader “suited occupation” cover, as losing the ability to perform all suited occupations would require much more extensive injuries or illness, and thus be less likely, than simply losing the ability to perform operations.

The principle behind the move has implications for holders of income protection insurance and also critical illness insurance in many professions, as it gives greater freedom to ensure a payout if you are forced to give up the profession you have trained for.

This provides considerably more reliable income payment protection insurance cover (IPPI) for all professions. In the past, for example, a professional lorry driver, injured in a road accident and confined to a wheelchair, could have been denied a payout, as the insurer could maintain they were still fit to work in other professions, such as office administration.

Many of us hold a life insurance policy that is designed to protect our family, or pay off our mortgage. We are also aware of the benefits of critical illness insurance, which provides a lump sum in the event of serious health issues.

However, far fewer of us avail of the range of insurances that can provide regular payments to replace our salary, in the event that we are suddenly deprived of our working income.

Here are the main options available.

Income Protection Insurance (IPI) provides a monthly payment when you are unable to work due to illness. It is different to critical illness insurance in that it does not pay a lump sum, but pays a regular income over an agreed term, usually 12 or 24 months. Income protection insurance does not pay your full salary; as a rule you could expect to receive around 50% of your previous monthly pay, tax-free. Payment does not begin immediately, but after an agreed ‘deferred period’ ranging from 4 weeks to 2 years. The longer the deferred period, the cheaper the premium you pay.  Confusingly, income protection insurance is also known as ‘disability insurance’ and ‘income replacement insurance’. It does not cover redundancy.

Permanent Health Insurance (PHI Insurance)
Permanent health insurance operates in a similar way to income protection insurance above, but is a much longer-term product. Permanent health insurance can actually cover you from the onset of illness up until your retirement. Again, this product provides a regular income to help pay the bills, and does not cover redundancy. Both these insurances can be invaluable to the self-employed, who may have no other means of supporting themselves in the event of ill-health.

Accident, Sickness & Unemployment Insurance (ASU)
ASU cover is the only income protection product that covers redundancy, in addition to covering health-related loss of income. As with the other insurances above, cover begins after a deferred period, and usually runs for 12 or 24 months.

Mortgage Payment Protection Insurance
When ASU cover (see above) is set up specifically in relation to mortgage repayments, it is known as mortgage payment protection insurance (MPPI). This will, in the event of a medical setback, redundancy or unemployment, cover the cost of your mortgage repayments for an agreed period of 12 or 24 months, or until you return to work, depending on the policy you choose.

These valuable insurances are certainly worth considering as additions to a balanced financial plan. As with all insurance products, the various policies available have their own unique terms and conditions. The assistance of a financial adviser is crucial to understanding the exclusions covered in the ‘small print’ of your insurance policy.

The research underlines the dire need for guidance and financial advice in the general area of budgeting and financial planning, with most families underestimating their own ‘running costs’ by 50%.

Of over 2,000 adults surveyed, the average claimed monthly expenditure per family was £1,037. However, a formal tot-up of their actual outgoings revealed a true figure of £2,001, a difference of £964.

Couples without children seem just as disorganised in their personal finances, with an average estimated spend of £900 per month falling far short of their actual spend of £1,634.

Need for Accident, Sickness & Unemployment Insurance (ASU Insurance)

Bright Grey had commissioned the survey to ask consumers how long they and their household could survive on a redundancy payout of £10,000. Based on the highly conservative estimates of their outgoings detailed above, their predictions for how long they could subsist on the payout were equally unrealistic.

While most believed that £10,000 would last 10 months, the figures above reveal that, for the typical family, 5 months is a more likely figure.

Furthermore, the report indicated that 38% of the UK’s working population could survive just one month on their savings alone.

The report reveals the need for accident, sickness & unemployment insurance (ASU insurance), which offers short-term assistance in paying bills in the event of redundancy, accident or ill-health.

ASU cover usually begins one month after the end of employment, and lasts for a limited period of 12-24 months.

*Source: The Reality Gap Report, Bright Grey 2009

Here are a few thoughts on your financial products, that could actually save you money.

Mortgages: the mortgage market is changing every week, and while most of us hold only one mortgage, we still have access to thousands of mortgage deals. With an independent financial adviser who can take a ‘whole-of-market’ approach and trawl through all the mortgages available, it is highly likely that looking at your existing arrangement could result in a better – and cheaper – mortgage deal.

Pensions: Some people complain about the way their pension is performing. We have news for you – pensions don’t ‘perform’!

A pension is a ‘wrapper’ that provides a tax-free investment in a group of underlying investment funds. It’s the investment funds, not the pension, that are performing – or not performing – for you. By overhauling your pension from time to time, you can ensure that your investment isn’t running into the sand. Remember – with an immediate 20% in tax relief on contributions, there’s no other savings product that even comes close to your pension. Did you know – during the lifetime of the average pension, every £1 invested in the early years can turn into £28 for you!!* Your pension is the taxman at his most generous.

Insurances: Some you have, some you don’t, and some you don’t need. Still, it does no harm to be aware of the options available.

Life insurance: alongside home contents insurance, this is the most familiar insurance product. Life cover pays out to your beneficiaries when you die, to ensure they do not suffer financial hardship from the loss of your income. It can also be used to clear a mortgage, or to meet the anticipated costs associated with Inheritance Tax when transferring your wealth to your children.

Critical Illness Insurance: pays out a lump sum if you fall victim to a list of defined negative health events, such as heart attack, stroke, or cancer. This insurance is perfect for protecting yourself and your family against loss of income if you are rendered unable to work due to health problems – and, considering that one in four of us are, before retirement, it’s a good insurance to have.

Income Protection Insurance: provides a replacement income when you are struck down by ill-health, and pays monthly, unlike critical illness with its lump-sum payout. Various types of income protection insurance are available: some pay for just one or two years, others (known as ‘permanent health insurance’) can pay you up until you retire. A popular but not inexpensive option for the self-employed in particular.

Accident, Sickness and Unemployment Insurance (ASU): this is the only insurance that protects you against losing your job. It provides regular payouts that will assist in paying the bills while you are unemployed. You are also covered if you must stop work due to a workplace accident, or general ill-health. Often used to cover mortgage repayments, in which case it is also known as Mortgage Payment Protection Insurance (MPPI).

 *Source: Hargreaves Lansdown

Times have never been better for taking out personal insurance, as recent improvements in the way insurers deal with critical illness claims may now be extended to income protection insurances as well.

Critical illness insurance provides a lump sum payout when a claimant has been struck by a severe condition, such as heart attack, stroke or cancer.

Income protection insurance provides a regular replacement income to those who are rendered unable to work due to disability.

The large insurance companies have since 2008 been publishing data on their critical illness claims, and showing in particular that they have softened their view of claims where the customer has accidentally or inadvertently supplied inaccurate information on an application form – an error known as ‘non-disclosure’.

Insurers have now generally accepted the suggestion that a critical illness claim should no longer be rejected, where the claimant can show that the non-disclosure was not deliberate.

While accidental non-disclosure may still preclude a full payout, insurers have agreed to pay customers a fair sum which reflects the risk and the premiums paid.

As a result of this, insurers such as Aviva have reduced the percentage of claims rejected due to non-disclosure to 2% in the first half of this year. This is a considerable improvement when compared to the situation in previous years. The Financial Services Authority noted that in 2006 a quarter of critical illness claims were rejected, and that half of those rejections were due to non-disclosure issues.

The increased transparency due to the publication of data is regarded as the driving force behind the increased acceptance of claims.

Income protection may follow suit

The Association of British Insurers has said it now intends to publish annual details of claims data for income protection insurance, in a move which is likely to result in similar improvements for claimants in that sector.

The Financial Ombudsman has stated that with income protection claims, most complaints relate to claims that were not rejected, but where the payout was less than expected.

Be aware, that when advising clients and building our Principle First portfolios, we are continuously making use of the information we get at these meetings.

Global Emerging Markets and Asia, is where Invesco think the majority of growth will occur over the next year. they feel that Corporate Bonds will continue to do well until the end of the second quarter next year. Invesco Perpetual’s Corporate Bond is one of the largest funds of its type.

They also highlighted those clients who feel they do not wish to venture outside the UK investment market. These clients may still be heavily exposed to the world economy, as companies within the UK funds often have considerable operations offshore. These firms are also very open to volatile exchange rates. It’s worth thinking about. I have commissioned John Doherty our Editor and chief researcher to look into this more.

For those investors who believe they can invest in the short term, and not the medium to long term, here is a great piece of information:

79% of shares purchased on a 1 year period are purchased by sentiment.

18% of shares purchased on a 5 year period are purchased on sentiment.

Leave sentiment for the losers; invest for the medium term.

An employer currently has no legal obligation to provide a pension scheme. However, if the company has more than 5 employees, it must designate a stakeholder pension scheme, that is, one run outside the company, typically by one of the large insurers.

The employer has no obligation to contribute to the scheme, but simply to facilitate employees making their own contributions.

There are two main types of company pension schemes.

The ‘final salary scheme’, also known as a ‘defined benefit scheme’, guarantees you a percentage of your final salary when you retire. Typically you would receive one-sixtieth of your final salary for every year of service to the company. By that measure, if you worked for your company for thirty years, you would receive a pension equal to half of your final salary in your retirement. This gives you a degree of guaranteed purchasing power, regardless of economic conditions and inflation. In final salary schemes, the company must stump up more money if the underlying investments are under-performing. As a result, companies are becoming more reluctant to set up or expand such schemes.

In a ‘group personal pension’ or ‘defined contribution scheme’, you define how much you contribute as you work, but there is no guarantee of the return you will receive at the end. That return depends on the performance of the funds where your pension has been invested.

If you as an employee change job, you can take your pension with you. A “Transfer Value Analysis” can be requested from a qualified tax expert, which will compare the value of your accrued benefits if left where they are, compared with their value if you moved them to your new company, or to another scheme. These are not exact calculations, as they must make certain assumptions, but can be helpful where, for instance, a person is considering moving his pension from a company scheme to a personal pension scheme.

Other ingredients in the employee benefits package might include income protection insurance, ‘death in service’ life insurance, and private medical health insurance.

Where income protection insurance is included, the cover might typically provide the employee with 50% of his salary in the event of incapacity, guaranteed until he reaches retirement age.

The  ’death in service’ life cover would pay out a lump sum, typically equivalent to  2 to 3 times the employee’s annual salary, in the event of his death. With group insurances you often have a free cover limit, which means that, up to a certain limit of cover, no medical evidence is asked for – the insurer calculates that the health of a group averages out better than the health of one individual. This is known as the ‘non-selection limit’ in the scheme. To qualify for the non-selection limit, you normally must have been at work for the previous two months.