Take your pick. - Insurance Age

- Insurance Age staff
- 08 May 2002
- Indicative reading time: 6 minutes

Keith Sankey samples an assortment of healthcare insurance packages, finding a product to satisfy all and even a 'pick and mix' option.

Serious illness or injury can disrupt the best laid plans,
potentially putting an individual or corporate client's earning power,
home and business at risk. There is, therefore, a need for healthcare
insurance cover and the financial protection and peace of mind this type
of insurance brings.

There are three main types of healthcare insurance. Personal accident
cover offers short-term protection and is available from general insurers
in the company market and Lloyd's. Critical illness and income protection
insurance both offer financial security for the longer term. The main
providers are the life assurance companies but, provided they are for a
fixed term and offer protection only with no element of investment, CI and
IP policies are currently not regulated by the Financial Services
Authority.

CI cover is often packaged with life assurance, in which an 'accelerated
benefit' plan pays out a lump sum benefit if the client suffers a named
critical illness or dies. The three types of healthcare protection are not
alternatives but can complement each other.

Private provision

Why should individual clients consider private insurance provision? After
all the State does provide benefits. These benefits, however, are very
basic and Government rule changes in 1995 mean they are not as generous as
in the early 1990s.

Those who are employed should qualify for Statutory Sick Pay for the first
28 weeks of any period of incapacity but this is taxable, paid by
employers and, at the time of press, typically only £62.20 a week. If the
individual is still not well enough to work after the initial 28 weeks,
they should apply for Incapacity Benefit. However, qualifying is not
easy.

Would-be claimants are medically assessed by the Benefits Agency's own
doctors some time between the 28th and 52nd weeks of their disability and
have to prove they are unable to perform any reasonable paid work.

Even if they do qualify, the benefits available still provide no more than
survival money - at time of going to press £62.20 a week for weeks 29 to
52 and £69.75 a week after that. Payments are taxable and though those
with dependents may qualify for additional payments, the total received
still falls a long way short of what a typical family needs to maintain a
reasonable standard of living.

Self-employed

The rules for the self-employed are similar - the key difference being
they may receive short-term Incapacity Benefit instead of SSP for the
first 28 weeks.

Those with mortgages may qualify for extra help from the State but, for
loans completed on or after 1 October 1995, this is also less than it was.
Those who are not working (for reasons including redundancy as well as
illness and injury) have to wait 39 weeks for any help and even then will
only have their interest paid - the Government will not pay off any of the
loan capital or contribute to other expenses such as the cost of buildings
and contents insurance.

There are two other important restrictions. Only the first £100,000
borrowed qualifies for State support - a buoyant property market means the
number of people caught by this limit has been rising steadily - and there
is no help available for mortgage holders with savings and investments
worth £8000 or more. The Government admits that some 70% of all homebuyers
will not qualify for income support so there can be no doubt individuals -
not just those with mortgage commitments - should consider making their
own private provision.

Corporations also need healthcare insurance cover. The temporary or
permanent loss of a working director, senior manager or other vital member
of the workforce can cause as much financial damage as a major fire.
Corporate clients should insure their human as well as their physical
assets.

Of the three types of healthcare insurance cover, PA usually comes in the
form of a general insurance product. In its most basic guise, it pays out
a lump sum to individuals who are involved in an accident and left
permanently and totally disabled, lose their sight, lose one or more
limbs, or die. However, cover can be extended so that a policy will pay
out a regular tax-free income to someone who is temporarily disabled and
unable to work. Typically payments would start after a short deferred
period of four weeks and, unless the client recovers sufficiently in the
meantime to be able to return to work, continue for a maximum of a
year.

CI insurance pays out a tax-free lump sum if an individual suffers any one
of a long list of illnesses and survives a short period afterwards,
typically 14 days. If the cover is packaged as an 'accelerated benefit'
with life assurance, the policy will pay out if the person insured dies
within those first two weeks. The usual list of illnesses includes certain
surgical treatments - coronary artery bypass and angioplasty - physical
conditions such as deafness, blindness and serious burns and the 'big
three', cancer, heart attack and stroke.

White-collar cover

Permanent and total disability is also often covered. For those in
white-collar occupations, the usual definition is the inability to carry
out the duties of their normal occupation. Those in blue-collar jobs,
however, must meet a more stringent test and prove to a doctor they are
unable to perform a set number of physical and mental tasks, typically
involving three out of eight 'daily activities'.

Life assurance companies offering CI insurance subscribe to a statement of
best practice provided by the Association of British Insurers. A revised
version is due and changes are expected to include mass screening for
prostate cancer and new blood tests that check whether a policyholder has
suffered a heart attack.

By contrast, IP insurance pays out a tax-free income to a client unable to
work due to illness or injury. After a waiting or deferred period, which
can vary between a few weeks and two years, regular payments continue
until the claimant is fit enough to start working again or until the end
of the policy term. This can be 20 or 30 years or even longer and IP cover
can be arranged to continue through to the expected retirement date. As
with CI insurance, there is an ABI statement of best practice for IP that
requires insurers to present information in a standard way.

Insurance intermediaries can combine all three forms of financial
protection into a healthcare insurance package tailored to fit the client.
In any period of incapacity, PA cover will meet the short-term income
replacement needs. If the cause is a serious injury resulting in loss of
sight or a limb, or the disability is 'permanent and total', the insurer
will pay out a lump sum. The adviser may also consider adding unemployment
insurance to cover the risk of involuntary redundancy.

The CI element of the package will pay out a tax-free lump sum if the
client has a heart attack, is diagnosed with cancer, suffers a stroke or
is struck down with any of a long list of less common medical
conditions.

The risks are much higher than generally perceived and insurers provide
sales aids to help get this message across.

Buffer zone

CI cover aims to provide a buffer to help an individual, their family or
business to cope financially and emotionally at a difficult time. The
money can be used to pay off the mortgage or other debts, cover the costs
of private medical treatment, convalescence or a battery-recharging
holiday abroad, or adapt the home, workplace or car to help cope with
residual disability.

Life assurance may or not be included and provided it is on a protection
or no investment element basis is not regulated by the FSA. Non-FSA
authorised advisers can, therefore, recommend it to clients.

Where the insurance is required to cover a 'repayment' or 'capital and
interest' mortgage, the lump sum assured can be arranged to decrease each
year in line with the outstanding debt - slowly at first and faster later
on. It is also possible to jointly cover the lives of a client and
partner.

The policy will pay out when one of them suffers a named critical illness
and will then usually stop.

While PA is designed to meet short-term income replacement needs, IP is
for the long-term. In designing a healthcare insurance package, an
intermediary can arrange that the deferred period for IP matches the
maximum claim payment period for PA - typically 12 months. This helps keep
the cost of the IP cover down and most modern IP policies offer some form
of inflation protection. Benefits increase in line with retail prices,
with average earnings, or at a set rate of compound interest.
Inflation-proofing comes at an extra cost - usually the premiums increase
at the same rate as the benefits.

Spot the difference

There are two main differences between CI and IP cover. The obvious one is
that CI pays out a lump sum while the IP benefit is in the form of an
income, the other is that IP will often pay out where CI will not.

Two of the most common causes of IP claims are musculoskeletal injury or
impairment, including slipped discs and mental disease. CI insurance does
not normally cover these.

The IP insurers are keen to get claimants back to work. Not only does this
help their claims book and profitability, it helps the individual's
finances (maximum benefits are set some way below earned income),
self-respect and morale. Insurers pay partial benefits if a claimant can
only return to work part time or has to take a less demanding and lower
paid job. Some provide what effectively amounts to a rehabilitation
counselling service.

In putting together a healthcare insurance package for a client, an
adviser can select the specialist products of different insurers - one for
PA, CI and IP. However, there is now an alternative. A few life assurance
companies offer a menu of healthcare (and life) insurance products from
which the adviser can mix and match. Proponents of this type of
arrangement claim that it comes with a number of special advantages.

One of the main providers of these comprehensive protection packages is
Liverpool Victoria with its MIMI product (Money if you get ill. Income if
you can't work. Money if you die. Income if you lose your job). Helen
Collins, segment development manager for the IFA Division, explains:
"Advisers can construct a protection package from a wide selection of
components.

For clients with mortgage commitments, these even include unemployment
cover.

"The advantages include convenience - there is only one policy document
folder and just a single direct debit - and cost. The discounted policy
fees on offer mean premiums should be cheaper with MIMI than if the cover
is spread across different products and providers."

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