Accident and Sickness Insurance

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Accident and Sickness Insurance

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Accident insurance pays out a tax-free lump sum if you suffer a specified injury or die: for example, you might get £5,000 for the loss of a finger or a big toe, £10,000 for the loss of hearing, £100,000 for permanent disability. Although this type of insurance is very cheap, sometimes it is even offered free as an enticement to you to take up some other financial product, the probability of your suffering the particular injuries that are covered is very low. On the whole, accident insurance by itself is not worth buying.

However, accident insurance is often included with other insurances, such as travel policies and car insurance. It is also sometimes combined with sickness insurance (the latter is not offered on its own). The sickness insurance element of the policy typically pays out a limited income, usually from the first week you are ill, for a maximum of two years, if you cannot work because of illness or an accident. As with income protection insurance, the income has been tax-free since 6 April 1996.

Unlike income protection, there is no ongoing cover with sickness insurance; you simply take out the policy for a year at a time. At renewal, the premiums can be increased or cover refused if you have built up a record of claims or suffered deterioration in your health. For this reason and because of the limited period for which the benefits are payable, sickness insurance is a poor substitute for income protection insurance.

More information

To find out more about the state benefits you might qualify for if you are ill,
contact your local Benefits Agency. Check your contract of employment or talk to your Human Resources department to find out what arrangements your employer has for paying sick employees.

Magazines publish regular surveys of income protection policies and critical illness insurance. Having identified suitable policies, you can contact most companies direct. However, because of the complex nature of income protection insurance and the many factors influencing premiums, this is an area where it is probably worth visiting an independent financial adviser. A good adviser will have access to a database of most or all of the policies available and can arrange quotations of those that would be most suitable for you.

Example

To illustrate the gap between state provision and income protection insurance, take a fictitious example of catering manager Gary Smythe.

Gary is 45, married with two children and earns £42,000 p.a. Here, we compare how much he'd be entitled to from the state if he fell ill and couldn't work, with how much he could get from an income protection policy-and how much he'd pay for one.

If Gary fell ill and had no insurance, he'd be eligible for incapacity benefit after the first 28 weeks. This would amount to a basic £60.20 a week plus £31.50 for his wife (because she has no income of her own), £9.85 for their first child and £11.35 for their second. The total weekly allowance would therefore be £112.90. This would mean that, if Gary were to rely on incapacity benefit alone, his income would fall by 86%.

However, he could take out an income protection policy to replace, say, 65 per cent of his income less state benefits. Gary chooses a policy with a 26-week waiting period, paying out £400 a week until he recovers or reaches the age of 65. Together with incapacity benefit, this would give him an income of 52 x (400 + £112.90) = £26,67o a year (63.5% of his pre-illness income). The policy costs Gary around £49 a month.

Protecting your family

Your top priority if you have dependants is to ensure that they are protected
financially if you were to die or be unable to work or a prolonged period. Here we concentrate on the role that life insurance can play in your financial plan.

Bear in mind that not only the loss of a breadwinner's salary could cause financial hardship: if you are caring for children, your spouse or partner might need to pay for professional childcare and/or babysitters if you were to die. Similarly, you should take into account any extra costs of running the house, maintaining the garden, and so on. A nation-wide government survey found that, housework, still done mainly by women today, takes up more hours each day than paid work. If all the cooking, cleaning, childcare, gardening, and so on had to be paid for at the market rates for each activity, they would be worth some £340 billion, about half of the whole national income.

Having identified that you need some life insurance, the next step is to work out how much. You might require a lump sum, for example to pay off the mortgage, as well as replacement income, which could be provided either by income-paying life insurance (known as family income benefit) or by insurance which pays out a lump sum which you could invest to produce the required income. To find out the basic cash and income your family would need in the event of your death, use the calculator to check.