Income protection V Specified illness

July 4, 2012

Assuming you have covered any debts that you may have with life assurance – A mortgage protection policy covering the mortgage on your home and a separate life assurance policy covering any other debts, what should you consider as a secondary level of cover?  Most people will have some additional life assurance on their lives to provide for their family if they were to die during their working or earning years.  This should ensure the financial well being of your family should you die, but what would you do if you were to suffer a major illness or an accident?  Your life assurance policy won’t pay out any benefit.  The next major set of options are to choose an income protection policy (aka PHI / permanent health insurance / income continuance) or a specified illness policy (aka serious illness / critical illness).  But how do you know which one to pick or which one would be better for your own circumstances?  The best way to approach this is to be absolutely sure of the differences between the two policies.

1.  Specified illness policy.

This policy will pay out a one off lump sum if you were to suffer from one of the illnesses as defined in the list of illnesses covered in the policy conditions for your policy.  Generally speaking, life assurance companies all cover the same main illnesses or conditions, but some cover more than others and their definitions of what a particular illness is can differ.  Normally, a policy will cover around 42 to 45 illnesses.  They are very specific illnesses though, so don’t necessarily think your ship has come in if you suffer from a heart attack, which as far as you’re concerned, is pretty serious.  This is one of the reasons why the name for this policy type has changed over the years… who considers what to be serious or critical – this leads to far too many arguements and disappointment on the part of the policy holder.  A specified illness policy is a more ‘specific’ term (sorry about that!).  It shows that a detailed list and severity of illnesses are covered under your policy’s termd and conditions.

Assuming you will receive a payout from your specified illness policy if you suffer from a major incident, you could use this lump sum to pay down part or all of your mortgage or remodel your home to make it more wheelchair friendly if required.  Alternatively, you could use the money as a lump sum to feed into your current account on a monthly basis, to make sure you can cover all of your bills.  A major drawback of thsi policy type is that it can be quite expensive to cover yourself for any meaningful amoutn of money.

2.  Income protection plan.

An income protection plan is an insurance policy that will provide you with a monthly income until you return to work, reach retirement age or die.

I must admit to being biased about my preference for an income protection plan above a specified illness policy.  I feel they are more reasonably priced, thanks largely to the tax relief available on the premiums, which is not available with the premiums for a specified illness policy, but they are also far more open in terms of what types of illnesses or injuries are covered…. there is no list.  If you suffer from any accident, illness, injury or disability that prevents you from doing YOUR OWN job, then you have a valid reason to make a claim.  Interestingly, approximately 50% of all income protection claims would NOT have been covered by a specified illness policy.

As equally useful as the terms of payout is the fact that the benefit is paid to you monthly, so you will continue to have a salary to pay your bills with every month.  Sadly, if you cannot earn your regular income due to an illness or injury, your bills do not stop.  If anything, they increase.  Your children still need to eat and go to school.  Your mortgage still needs to be paid as do all of your other household bills such as electricity, gas, bins etc.

Premiums for an income protection plan qualify for tax relief at the marginal rate of 41%.  This makes this type of policy far more affordable.  You can cover a maximum of 75% of your gross annual income, less any Social Welfare Benefit.  This is NIL for a self-employed person.

In an ideal world, people would have life assurance, income protection and specified illness cover.  But no world is ideal, so you have to choose as wisely as you can based on your own circumstances, budget and what you feel to be most important.  This is a conversation that we can have with you and help you to figure out what level and type of cover you and your family need.  Call us today on 1890 254 000.