Sick Pay Cover – Do you have enough?

I recently completed a financial plan for a director of a successful local company. Amongst the usual planning for pensions and life cover, I also wanted to address a much overlooked (and vital) area, which is the protection of income in the event of inability to work due to ill health. In this case, the topic was especially relevant because the business was young and very much reliant on its director to drive sales. He was clearly good at this because of the trajectory of profits achieved so far.

With no cover elsewhere, other than capital achieved from sales within the company which would deplete quickly without its sales 'driver', this was an area of exposure that once identified, the director wanted to address promptly.

Far too few people consider the impacts on their household finances in the event of them being unable to work due to ill health. Statutory Sick Pay (SSP) only pays for a maximum of 28 weeks at a level of £85.85 gross per week (2012/13) paid by the employer with income tax and National Insurance to be deducted.

In this blog, I wanted to look at the factors that can affect the final monthly premiums offered on Income Protection Policies, all of which are subject to medical underwriting.

The obvious factors are existing health condition, age and if the applicant is a smoker (which would see premiums lift significantly).

The other main factors which now influence premium levels are as follows:

G-Day
The recent EU ruling on the equalisation of rates between men and women has seen the most dramatic increases on male applicants for income protection policies. In some cases the increase has been as high as 40-50% increase for a male applicant in comparison to pre-G-Day (Gender Equalisation day of 21st December 2012), although a more typical increase could be around 25-30%. Conversely, female applicants should see a reduction of their premium in comparison to their premiums pre-G-Day, although I don’t believe it will be as large a discount as the increases seen for males.

End date / Term
As noted above, the maximum term which SSP pays is 28 weeks, however most Income Protection Plans, also known as Permanent Health Insurance (PHI) policies, can be set with a cover period up until the applicants 65th Birthday, possibly even longer depending upon the insurer. Obviously the longer the cover period (especially with the policy term into the advanced age range of 55 to 65) will increase the premium accordingly, however this longer period can be invaluable when planning your protection needs because it allows for some income provision beyond the Statutory Sick Pay (or even an employers’ own sick pay arrangements).

Inflation uplift / Escalation
At the outset of the insurance policy you can select whether the cover amount will stay level (cheaper premiums) or escalate / increase (usually in line with inflation as an example). Escalation will increase the monthly premium, but if the policy is to be in force for many years (for example a 30 year term) then at the point of claim the escalation of benefit could prove very worthwhile if the claim is towards the end of the policy term.

Waiting Period
This is sometimes referred to as a deferral period and is the length of time the claimant has to be unable to work due to ill health before a claim will be paid. The longer you set the deferral period the cheaper the premiums will be, however planning should be taken to ensure that sufficient other funds / income are available to provide for loss of income during the selected waiting period. Examples of waiting periods might be 4, 8, 13, 26 or even 52 weeks.

Calculation of amount of cover (maximum)
One of the key drivers for insurance premium costs is obviously how much cover is required and, therefore, the amount the insurer will have to pay in the event of a claim. In my opinion, the key minimum cover should be the amount the individual pays towards household costs on a monthly basis. However, in most cases this is not the ideal and careful consideration should be taken in planning the appropriate level of cover.

Dividend v Salary
This is a very important issue, especially considering my example case mentioned above. This is because many business owners / directors pay themselves nominal salary and higher dividend amounts for tax, and potentially cash-flow, purposes. Many insurers may not include the dividends in their calculation of a claimants income, so the desired amount of cover may not be available, or even paid, in the event of a claim. Some insurers may apply an increase in premium to reflect that they will include dividends. Careful attention of the terms and conditions of the income calculation allowed must be considered before starting the policy.

Guaranteed / Reviewable Premiums
The final major point which could affect the premium illustrated is whether the premiums are guaranteed (i.e. they will not change, apart from escalation if chosen, during the term of the policy) or reviewable. Reviewable premiums allow the insurer to calculate premiums collected against claims amounts paid and if they believe that there is a discrepancy then they can amend the premiums accordingly. This review tends not to be done on an individual basis but rather on a demographic basis for the insurers “risk book”. Guaranteed premiums tend to be slightly more costly at outset, but at least you know what you will be paying during the term of the policy.

Individual or Employer pays the premium
Generally speaking, insurers have an understanding that all income protection policies which an individual can hold will pay a combined maximum of 50% of a claimants gross annual earned income. This will normally be paid on a tax-free basis if the individual pays the premium. If the premium is to be paid for by the employer, then the maximum available is usually 65-75% of the claimants gross income paid on a taxable basis.

As you would expect, each element noted above is likely to have an effect on the final premium offered. Being independent financial advisers (IFA's) we have the ability to use the whole market to search out competitive providers in most circumstances.

No individual advice has been provided during the course of this blog. Protection in the event of either death or ill health should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800

Simon Hewitt BSc (Hons) Dip PFS
Financial Planner

Chapters Financial Limited 
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.

Have you prepared for your life-stages?

As we approach the end of what some called summer 2012 (weather excluded) we saw many sporting events with athletes and competitors striving to achieve 'Gold' in their many and varied disciplines. Closer to home, I attended a party to celebrate my parents 50th and Golden Wedding Anniversary. Many congratulations to them on such a great achievement.

In mingling with the fellow well-wishers, I was able to catch up with many faces that I had not seen for many years and to note a few who were no longer with us, along with some tales of wellbeing and, sadly, ill health. It was a diverse group, young and old, and it was interesting to witness the change and development in the lives of each I spoke to. One attendee commented on this very point, noting that he was now, possibly unwillingly, the head of the family and that time was passing so fast that he, like many at the party, have had to step up to the mark as your time comes. Many readers of this blog will already know this experience. However, it is still interesting to see such a 'snapshot' in one evening.

The needs and reliance of each member on each other within each unit was clear and the next morning, as the nights memories came back into view, in made me think about the importance and benefit that insurance protection, in all its forms, really can provide to ensure that financial security can be maintained when life throws a 'spanner in the works'.

For reference, I have listed below what should be considering ensuring both you and your loved ones are protected properly. 

Life Assurance

The first, most obvious protection that those with a dependent family to protect should think about having in place is Life Assurance. In the event of death, I am sure that you would want any mortgage/liabilities repaid, and leave a balance to provide capital/income to the family to see them through into the future after their loss. Don't forget to think about your spouse or partner and ensuring that they are adequately covered. 

Life cover can be provided as a lump sum or in the format of a set 'income' paid each year for a set term (Decreasing Term Assurance). This latter option can sometimes reduce monthly premiums paid. 

You might want to see what cover your employer (if you have one) offers as a Death-in-service benefit (DISB). Some also use this type of cover to protect against the effects of inheritance tax (IHT) on their estate in the event of their death. 

If you take on life cover, you can usually write this in trust to ensure that the proceeds fall outside your estate (for inheritance tax purposes (IHT)) and available without recourse to Probate. This should mean that the proceeds of the policy are available quickly. Most insurance companies will offer a Trust wording free of charge. If you have an existing policy, you can usually still add a Trust to the plan and this is usually worthwhile considering.

Income Protection/Replacement

If you were unable to work due to ill health, do you know how long you could survive financially? Have you thought about it? You may have emergency deposit savings (possibly 3-6 months’ income) to see you through this unexpected (and unwelcome) experience, but thereafter, what happens? Have you checked recently what, if you have one, your employer’s policy on protecting their staff is? It is possible to put in place an Income Protection plan, sometimes known as a PHI (Permanent Health Insurance) policy. This is arranged to pay an agreed level of income in the event of inability to work due to ill health until a fixed age (say 60-65 as examples) after a waiting period (benefit will only be paid after this time). The waiting period (selected at outset) is usually 8-13-26-52 weeks and the longer the waiting period the lower the premium paid per month. You can also build other options into this type of plan, such as protection against the effects of inflation, as one example.

Critical Illness Protection

The thought of contracting a critical illness can always be a concern and this type of cover should be seen as a compliment to Permanent Health Insurance rather than an alternative because they work in different ways. If you decide only to take one type of cover then speak to your Independent Financial Adviser (IFA) or Chapters Financial Limited about the differences and your requirements.

A Critical Illness policy (CIP) pays a lump sum (usually after a period of 28 days from diagnosis) on diagnosis of a critical illness. The 'devil can be in the detail' in this type of plan on the conditions that are covered. In our experience, the existing older plans see broader definitions and this can make these types of plan valuable. You will usually set an end date for the cover (again this maybe 60-65) and a sum assured, the lump sum you would like to receive, in the event of diagnosis of a critical illness.

Private Medical Insurance (PMI)

This type of cover, as the name suggests, provides financial protection for medical costs in the event that medical care is needed. Some employers offer this to their staff part of their benefits package and this is a taxable benefit in kind if received. The plans usually have an 'excess' level, an amount that you have to pay before the policy will, and this can vary. The higher the excess will usually see the lower initial premium paid.

Summary

You can see that there are various options (and combinations of cover) available to those who are at a life-stage where protection is needed, both for their own financial security and that of their family/loved ones. 

No individual advice has been provided during the course of this blog and when you are considering your needs or reviewing your existing arrangements then please seek professional independent financial advice (IFA) for your needs and requirements. Chapters Financial Limited would be pleased to help you assess your needs, the cover you need and make appropriate recommendations.

We look forward to working with you. 

Keith G Churchouse, Chartered Financial Planner
Director, Chapters Financial Limited
Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority. Number 402899

The Financial Services Authority does not regulate Trust documentation.