Income Protection Insurance (Permanent Health)

Below is a rough guide to Income Protection Insurance (PHI) but it is not an exhaustive definition.

What would you do if you were unable to work long-term due to accident or illness? Your employer may pay you for a while, but then you would need to look to savings, pensions if any, social security, and the generosity of others.

Income Protection insurance is designed to pay you a replacement income if you are unable to work which can be inflation protected, until retirement. Industry rules dictate you may not insure all of your income, but may insure most of it (two-thirds to three-quarters is typical).

If you are employed and have group income protection insurance (permanent health insurance) arrangements available to you, then in most cases that will be the choice to follow. Group schemes carry valuable premium discounts through economies of scale, and are often non-contributory for the employee.

For those whose employers do not provide group arrangements, or the self-employed, then individual policies are available.

The income protection insurance (permanent health insurance) policy will normally pay out some time after the date at which you stopped working (normally known as the deferred period). The shorter this period, the greater the premium. Options are generally for three months, six months or twelve months. Clearly if your employer will pay for six months you will not need the policy to pay out before this, in addition the insurer may not pay out the full amount until earnings have reduced. The premiums depend on age, occupation, and will normally exclude pre-existing conditions.

Be careful over your selection of definition of disability. “Own occupation” means that the income protection insurance company will not expect you to restart when fit enough in an occupation you were not already in. “Any occupation” allows the income protection insurance company to insist that when you are sufficiently recovered, that you take up any occupation, this may be in a different arena to that which you were in before your absence. Skilled or highly trained people should consider carefully the definition that they are applying for, this especially applies if you are in a potentially risky job where a small problem can affect your ability to work. “Own Occupation” may not be available for all occupations and may be declined following medical underwriting.

Be aware that many policies are reviewable. This means that if the overall claims experience of a income protection insurance company over their bank of policyholders, are greater than expected they can increase the premiums across the board to all policyholders. 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 reviewable quote may not prove to be such good value as a guaranteed quote.

Taxation of Benefits:
Although this could change in the future, as a general rule, benefits paid on privately-funded income protection insurance policies are paid free of income and other taxes. This is important when estimating the extent of cover required.

* If your PHI (income protection insurance) is arranged by your employer under a group scheme then benefits ARE taxable. However you can be covered for up to 75% of income.