Have you ever wondered how you and your family would pay the bills if you had to miss work due to illness? The solution could be health insurance coverage or income protection coverage as it is more commonly called. Here’s how it works.
What is health insurance?
Sickness insurance used to be known as permanent health insurance. Regular income is paid to replace your salary if you are unable to work due to ill health or injury. The policy pays out until you are able to return to work or until you reach retirement age, whichever comes first.
How does health insurance work?
Health insurance pays a percentage of your normal income while you are away from work.
How much will the health insurance pay out?
Sickness insurance pays up to 70% of your gross income. It is not worth 100% because the monthly benefit you receive from the income insurance policy is not taxable because you have already paid tax on the earnings you use to pay the premiums. You may also receive statutory sick pay and be able to claim benefits if you are absent from work due to long-term illness.
Your payments will be taxable if your employer pays the premiums as they will be paid out of your pre-tax income.
When will the payments start?
You will usually have to wait at least four weeks. The grace period will depend on factors such as the amount of contractual sick pay you receive from your employers and whether you can claim statutory sick pay.
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Is health insurance right for you?
A variety of factors affect whether health insurance is right for you. Here are some questions to ask before you decide.
Do you already have insurance from your employer?
Some employers offer health insurance as a benefit to employees. Check if this is the case for you and what level of cover is provided.
Do any of your other insurance policies include health insurance?
Some policies include health insurance that covers certain payments, for example, mortgage payments.
You may still need a separate policy to cover other bills, but the amount of cover you need will be less.
Do you have savings?
You may think you don’t need insurance because your savings will cover your monthly expenses. However, consider how much your savings will go. If you are away from work for an extended period of time, your bank account could be seriously depleted.
Benefits of health insurance
Who? considers income protection insurance “the only protection policy every working adult in the UK should consider.”
The main advantage of health insurance is that it allows you to maintain your quality of life. You can get company sick pay from your employer or claim statutory sick pay, but this is likely to give you a much lower income than you would get under an income protection policy.
Paying the mortgage and household bills
Mortgage protection insurance can cover this expense when you’re away from work, but it won’t cover other bills.
Health insurance policies provide regular payouts much closer to your usual net income to cover household expenses such as utility and food bills.
Caring for your children
Being able to pay for your children’s childcare and extracurricular activities means their lives can continue as normal if you fall ill. If your children are older and rely on you for financial support, your health insurance may cover these costs as well.
Credits
If you have other loans, such as car finance, sickness insurance will allow you to continue making monthly payments if you don’t already have payment protection insurance.
Household maintenance
Long-term ill health or disability can mean putting home improvements or maintenance on hold, or finding funds to adapt your home. Sickness insurance gives you a monthly income to cover payments for home improvements or other adaptations.
How much does sickness insurance cost?
The cost of your monthly premium depends on various factors including the terms of the policy and your circumstances. Here are some factors that affect the cost of your monthly premiums.
Age
The older you are, the more likely you are to experience ill health and claim on your policy. Most insurers will offer a termination policy between the ages of 50-70, depending on your planned retirement date.
Health factors
Your premium will be lower if you are in good health. If you have chronic or pre-existing conditions, or if you are a smoker, this will increase your premiums.
Your insurer will also ask about your family’s medical history to look for any genetic or potentially inherited conditions.
Your occupation
A high-risk job means higher health insurance policy premiums. Different insurers will value the same deal differently, so it pays to get several health insurance quotes to find the best value.
Your activities outside of work
What you do outside of work is just as important as your work. If you only have low-risk hobbies, your premiums will be lower than if you play dangerous sports.
The level of cover you need
The amount your policy pays affects the cost of your premiums, so it’s worth thinking carefully about how much cover you’ll need.
You can start with your net monthly income and the amount of company sick pay or statutory sick pay you will receive. Consider how your monthly expenses may change during your absence from work. Your heating bills may increase, but you’ll save money on your commute.
If you currently receive means-tested state benefits, consider whether your sickness insurance will affect your entitlement if it goes over a certain level. Health insurance policies are designed to provide long-term cover, so it’s worth considering what level of income you’ll need if you lose some of your benefits due to changes to the system.
Deferred period
The grace period is the time between the start of your absence from work and the payment of the policy. The longer the waiting period, the cheaper the premium.
If you will receive full sick pay for the first few months, you will be able to cover your monthly expenses without the need for health insurance payments. Choose a shorter overdraft if you will only receive statutory sick pay and need to start your monthly payments earlier.
Index linking
Accident and sickness insurance provides a monthly payment based on a fixed percentage of your earnings. While short-term policies cover up to two years, most accident and sickness insurance is designed to provide long-term cover.
You may find that what would comfortably cover your living expenses now won’t be enough in a few years. Index linking means your premiums will be higher, but it can help prevent this and give you more financial protection in the future.
Definition of incapacity
Different sickness policies have different definitions of incapacity, and each will affect the amount of cover you receive. Most policies will pay out if you are unable to perform your current job. However, your premiums will be lower if you only agree to claim if you are unable to work.
Covering own occupation
This is the most comprehensive type of cover and will pay you if you are unable to carry out your work due to illness. This type of coverage may not be available if you have a high-risk job.
Suitable occupation
Sickness cover with a ‘suitable occupation’ clause will provide you with adequate cover if you are unable to work in an alternative job. For example, you can be a lawyer and work as a team leader managing other staff. Ill health resulting from stress may mean you cannot fulfill that role. Your ‘relevant occupation’ accident and sickness insurance would not pay for you if you could still do routine legal work.
Daily life activities or work tasks
This provides the lowest level of cover, as you would only receive an accident and sickness insurance payout if you were unable to do any work.
Your policy will pay out if you can’t do three basic tasks, including walking, climbing, looking or lifting. This type of policy is generally only suitable if you cannot get any other type of cover.
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Exclusions
Here are some of the most common exclusions that apply to accident and sickness insurance policies.
Standard exclusions
You will only be able to take out accident and sickness insurance if you are a UK resident. You will not be covered if you are a British citizen living and working abroad.
Health insurance will not pay for any of the following conditions:
- Self-harm
- Normal pregnancy and birth
- HIV or AIDS
- Abuse of drugs or alcohol
- Failure to follow medical advice
- Injuries sustained in war
- Injuries caused by criminal acts
Pre-existing medical conditions
Insurers will take details of your medical history to look for pre-existing conditions. Some conditions may mean that the insurer will not offer you accident and sickness cover. Others may apply an exclusion which means you cannot make a claim if you are away from work for this reason, so it is important to check exactly what is covered.
This could mean potentially serious illnesses are excluded, including back or musculoskeletal conditions and stress or other mental health conditions, which can be a significant cause of absenteeism.
Are there different types of accident and sickness cover?
Income protection insurance is the most common type of accident and illness insurance. However, there are other types.
Insurance in case of accident, illness and unemployment
An Accident, Sickness and Unemployment Insurance (ASU) policy offers short-term insurance to cover your monthly expenses while you are away from work. It will also pay off if you get laid off or become unemployed.
The advantage of the ASU cover
Accidental illness and unemployment insurance is cheaper than other types of accident and illness insurance. It includes unemployment insurance, which other accident and sickness insurance policies do not.
Disadvantages of the ASU cover
One of the main drawbacks is how much ASU cover you’ll get compared to a long-term accident and sickness insurance policy. It will usually only pay for itself in one to two years, so it’s not a long-term solution if you get seriously ill.
Accident and sickness insurance is tailored to your circumstances, but ASU insurance is not. This increases the risk that it won’t pay because exclusions are only taken into account when you make a claim.
Unemployment insurance isn’t suitable for the self-employed, mainly because you can’t make yourself redundant, and you’re unlikely to fire yourself. It does not cover short-term contracts or casual or seasonal workers.
Critical illness insurance
Critical illness cover pays a lump sum if you are diagnosed with a serious illness. Your insurers will ask for details about your health and lifestyle to tailor the policy to you.
Advantages
In some circumstances it can be helpful to have a lump sum payment instead of a monthly payment from your accident and sickness policy. You can pay some expenses upfront or invest money.
Critical illness insurance covers only the most serious conditions, such as cancer and Parkinson’s disease, so it is very rare for payment to be refused. The policy termination age is also higher than other types of health insurance, providing cover until you’re 75.
Disadvantages
One of the main disadvantages of this type of insurance is that it only covers the most severe conditions compared to other types of accident and sickness insurance, so you won’t be covered if your absence is for a less serious condition.
Depending on the terms of your policy, you may only be able to make a claim once. Premiums are also often higher than other types of accident and sickness insurance.
