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 comments followed a case where an insurer turned down a payment protection insurance (PPI) claim, quoting a clause blocking claims where the insured ‘became aware of any increase in the risk of unemployment’ during the first three months of the policy. 

The customer took his claim to the Financial Ombudsman Service (FOS), which upheld his complaint. The FOS criticised insurers over vague wording of clauses which could be used to turn down valid claims. 

Clauses excluding cover to individuals who become ‘aware of any increase in the possibility of redundancy’ are designed to protect insurers against claims from policyholders who took out cover, knowing that they were likely to lose their jobs. 

However, the FOS said the wording of some PPI contracts was so vague that any downturn in the UK economy during the first three months of a policy could be interpreted as rendering customers aware of the possibility of redundancy. This could then exclude them from cover. 

Consumer groups such as ‘Which?’ have stated that in the current general economic downturn, the vague wording of exclusion clauses could be used by insurers to turn down valid claims.

The comments highlighted the need for insurance applicants to have their financial adviser clearly explain the ‘small print’ in their insurance policy.

The ABI pointed out that some insurers do ask a specific question in their insurance application form, to assess if the applicant has any awareness that he is likely to be made redundant. It was important for applicants to understand that such knowledge could void their policy, the ABI stated.

‘I’m young and healthy – I don’t have a need for healthcare cover’

Not true. You are much more likely to have serious illness during your working life, than to die. That means that, between now and age 65, you are much more likely to need critical illness cover or another health-related insurance, such as income protection or mortgage payment protection, than to need your life insurance.

“What am I covered for with critical illness insurance?‘

Each insurer has their own list of what they include or exclude under ‘critical illness’. In general, a critical illness is a condition which befalls you and renders you unable to work. You have to survive the condition, in order to receive a payout. Some providers quote over thirty conditions in their policies, but most would agree that the core critical illnesses are cancer, heart bypass, heart attack, kidney failure, major organ transplant, MS and stroke. On the other hand, many policies exclude back trouble and stress, which are two of the major causes of being long-term unfit for work. A payout from a critical illness policy comes in the form of a once-off lump sum. Many people calculate their cover with a view to paying off their mortgage, but policies should not be limited to that.

‘So is mortgage protection insurance a different product?’

Yes, mortgage protection cover is an insurance designed specifically to cover your mortgage payments, should you be rendered unable to work. It makes a monthly payment, usually directly to your mortgage lender, and for a fixed period only, which is often 12 months.

“What is the difference between those two, and income protection insurance?’

Again, the name declares what the policy is designed to do. Income protection insurance pays out a regular monthly sum when you become unable to work. This is usually less than your previous salary, and may run for an agreed period only, although there are much more expensive variations on income protection that can pay out even up until your retirement.

“How do they decide if I’m entitled to a payout?’

If the insurer doesn’t look at your health records when you apply for cover, they will certainly do so, at the latest, if you make a claim. It is crucial that your application gives a true and full picture of your health. If you have not been totally honest, this is classed as ‘non-disclosure’ and can invalidate your chances of a payout later on.

MPPI policies are subject to a considerable number of conditions and restrictions, which make it prudent to consult a financial adviser when considering this form of cover.

MPPI pays out an amount equivalent to your mortgage payment when your income stops because of accident, sickness or redundancy. Most do not pay if you stop working or lose your job within six months of taking out the policy.

When a policy does pay, there is usually an ‘excess period’, which is the length of time between your finishing work and the policy beginning to pay out. While this excess period is normally one month, policies do vary, and it is always worthwhile for you or your adviser to check the ‘small print’.

Once the excess period is over, your mortgage is then paid by the policy, usually for 12 months.

When will the policy not pay?

A typical policy will refuse to pay if you are not working due to a medical condition you knew about when you took the policy out, or in the event of a previous medical condition that returns during the first year of the policy.

Back injuries and stress-related problems are two of the most common ailments causing workers to take time out from work – but both these are excluded from most mortgage protection policies.

Other situations which will not be covered in a policy include voluntary redundancy, dismissal for misconduct, or when you voluntarily resign from your position.

Another aspect of MPPI is that it does not apply to you if you are self-employed.

If you did not marry in your 20s, you may now feel that the time has come to marry and start a family.

You may take out a loan to help with wedding costs. Gone are the days when the bride’s family carried the full costs of the big day.

Perhaps you take your first mortgage, if you have not done so before. In the current climate you are advised to have saved at least 10% of the value of the home you desire.

Do you seek a fixed-interest or a variable rate product? Each has its advantages, depending on the investment climate at the time.

As a condition of the mortgage, a lender may require mortgage-related life cover. Do you opt for term insurance, which yields a fixed sum, or decreasing term insurance, where cover gradually reduces in step with the balance owing on your mortgage?

Separately, and with your family’s welfare in mind, you may consider writing a life insurance policy ‘in trust’. This simple arrangement has a dual benefit. Not only does it ensure quick and efficient release of funds to your family, should you die – it protects the funds from Inheritance Tax as well.

In the meantime, your family circumstances amay be changing. Remember to always review your financial products to ensure changes to your circumstances are catered for.

Critical illness insurance, for example, will pay you a lump sum in the event of incapacitation from a range of serious conditions and injuries. Your family income is secure, even if you are forced to give up work.

Income protection insurance will pay you a regular income if you are rendered ‘unable to work’ due to one ofthe circumstances listed in the policy. This is a good option if you are self-employed.

At 32, you have reached what one high street lender calls the ‘average’ age in the UK for starting to save towards your pension pot. While a good financial adviser would have already suggested you set up a pension in your twenties, now is certainly high time to do so.

There are a number of options. Do you go with your company plan, or consider a personal plan – or do you wait to be ‘auto-enrolled’ into one of the new government Personal Pension Accounts in 2012?