Make sure your insurance policy is a real life saver
In a perfect world, we would all buy insurance against the financial consequences of horrible things happening in our lives - death, serious illness or long-term health problems.
Unfortunately, we don't. Maybe we have better things to do with our hard-earned money. Or, perhaps we have a deep-seated suspicion that maybe the insurance won't actually pay up in our hour of need.
Every year, one million life insurance policies are taken out that pay up on death. This compares with half a million critical illness insurance plans that pay out a tax-free lump sum on diagnosis of illnesses such as cancer, stroke or heart attack. It also compares with just 100,000 income protection policies bought to provide a monthly (taxfree) benefit in the event of long-term illness.
These numbers defy logic. They should be the other way round. You have more chance of being off work for six months with long-term illness than you have of either dying or suffering a serious illness.
Income protection insurance
In practice, the protection insurance industry hasn't helped itself when it comes to the sale of income protection, as it writes plans where the policyholder literally has no chance of making a successful claim.
This is a result of the industry's propensity to assess many claims on the basis of loosely written 'activities of daily work' conditions, paying up only if the policyholder cannot perform basic work-related actions.
I recently had a long chat with chauffeur Chris Hargreaves from Manchester, who claimed on his Scottish Provident income protection policy three years ago when he was hospitalised. Without going into too much gory detail, he suffered an embolism on his left lung, lost a lot of blood and had numerous blood transfusions.
Chris spent six months in hospital, comforted by the fact that he had income protection cover. Given that he ran his own business, the cover was vital.
But he hadn't realised that his insurance wasn't worth the paper it was written on. This was because for it to pay out, he had to prove that he couldn't carry out at least two activities of daily work – such as walking unaided on a flat surface or holding a pen.
His policy was set up on this basis because he was seen to be in a high-risk profession where the chances of making a claim were higher than they were for, say, someone working in an office job. His claim was rejected because Scottish Provident simply didn't believe he couldn't carry out these activities.
Chris wasn't prepared to take the rejection of his claim lying down. He went to the Ombudsman and eventually got it to back him. Earlier this year, Scottish Provident was forced to pay his claim and provide him with compensation.
Having won his personal victory, Chris is now determined to get definitions such as 'activities of daily work' written out of all income protection policies. His view is simple: if you can't do your job, the insurance should pay up.
Insurers are slowly coming round to his view and realising that for income protection insurance to become mainstream, all policies should be written on an 'own occupation' basis (paying up if you're unable to do your own job) - something the likes of British Friendly and Cirencester already do.
Aviva has announced that 95% of new policies will be written on an 'own occupation' basis, while a protection insurance industry taskforce has said 'own occupation' should become the "definition of choice".
Hopefully, other insurers will follow Aviva's lead; and braver insurers will go one step further and transfer existing policyholders with cover written on an activities of daily living basis onto friendlier terms.
Income protection insurance should be part of a household's financial foundations. But it will only become so if the insurance industry gets its act together and designs a product fit for purpose.
Jeff Prestridge is personal finance editor of Financial Mail on Sunday. Email him at firstname.lastname@example.org
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
Income protection insurance
If you can’t work in the event of sickness or illness, income protection insurance aims to give you an income, with the amount of income set by you up to 75% of your gross (before tax) income with the premiums varying by how much of your salary you want to cover, as well as your age and health and when you want to start receive any payouts. Any payouts from income protection insurance are tax-free and usually continue until you recover, reach your selected pension age or the period of cover specified in the policy comes to an end. Income protection insurance does not cover redundancy but you can buy it as a bolt-on.