Illness during your working life it can have a disastrous effect on your earning potential. Kevin Walker explains how A range of policies can prevent that.
When you left medical school, you were probably approached by several insurance companies offering to sell you Permanent Health Insurance (PHI) and Critical Illness Cover (CIC)! What are they and do you need them?
Permanent Health Insurance (PHI)
These policies are also referred to as income protection policies and they provide a regular income if you are unable to work due to an accident or an illness that is covered by the policy conditions. The benefit is paid after the deferment period and to the end of the claim period or your normal retirement date, whichever is earlier. If you were sold a policy whilst you were a hospital doctor, then the chances are that the policy provides an income based upon a hospital doctors terms and conditions. Typically that is full pay for 6 months, then half pay for 6 months, and these policies dovetailed with the pay scheme if you were an employee.
The maximum benefit payable is based upon a percentage of your pre-disability income. So subject to what you were earning then, and what your GP earnings are now, then you may be over- or under-insured. These policies say as a whole that they also take into account income from other sources if you are ill, so if you were really poorly and you were able to claim a Tier 1 or Tier 2 pension from the NHS pension scheme, then this is also taken into account. So if you did suffer a serious illness then you might be paying for something that you can’t claim against. Let us look at the following example:
You are a locum GP who has previously accumulated benefits under the NHS pension scheme and the current accrued pension is say £30,000. Your locum earnings are say £100,000, and you are insured for 50% of your pre-disability income of £50,000. So let us say that you are in a car crash and you are in traction for 12 months, then yes the PHI policy pays out. But let us say that you can qualify for a Tier 1 pension then the £30,000 pension is deducted and you can only claim £20,000 from the PHI policy. The big advantage of a PHI policy is that the income is tax free in payment, which is why they restrict your claim because if the PHI is too generous, then where’s the incentive to go back to work? So what should I do?
- Check the benefit limit under your current policy.
- Is the deferred period fit for your role as a locum?
- Are you over- or under-insured.
- Make sure it covers you returning back to your usual work, not just any paid work.
- What is the current value of your NHS pension or other protection policies?
- If the policy has a limited claim period of say 1-2 years, if you were ill for that long then there is a pretty good chance of claiming the NHS pension.
Critical Illness Cover (CIC)
The advantage of this type of policy is that it is what I often refer to is as a “Me” policy, because you are the one who benefits, unlike standard life insurance cover that benefits someone else. Upon diagnosis of a critical illness that’s covered by the policy, then the lump sum is paid tax free. PHI and CIC are not the same; if you were diagnosed with, say, leukaemia, then the CIC policy pays out the lump sum and you can probably claim the PHI policy for the duration that you can’t work. So if you suffered a CIC claim, it gives you breathing space to decide what you want to do. If for argument's sake you were diagnosed with MS and the CIC policy paid out, would you really want to go back to work on the same basis?
With this type of policy, 90% of all claims are for heart attacks, stroke and cancer. Certain cancers such as basal cell carcinoma are not covered as they are not deemed to be a critical illness. Some policies will cover for HIV and hepatitis C, but only if you can prove that you were accidentally infected by say a stick injury and that it has been fully documented.
It is about 4-5 times more likely that you will suffer a CIC claim compared to death, which is why it’s more expensive. Now please take care here as some stand-alone policies just have CIC cover with no life cover included, and they typically have a clause that says you must survive 28 days after diagnosis of the CIC to claim. So the standing joke here is that if you suffer a massive heart attack then wait until day 29 before the switch is turned off! So if you have a CIC policy, check the terms and conditions covered and check if it includes life cover, since some policies cost the same with and without the life cover, so why not have both?
Kevin Walker, NHS Pension Specialist, BW Medical Accountants. Blackett Walker is authorised & regulated by the Financial Conduct Authority.