FOOL'S EYE VIEW
Protect Your Income

By Jane Mack (TMFJane)
September 17, 2002

According to government statistics around 7% of the working population is claiming state sickness benefits at any given time. In fact, there are also statistics indicating that one in five of us is likely to be off work for at least three months because of illness at some point during our working lives.

I can well believe it. About ten years ago I discovered that I had two cracked vertebrae at the base of my spine. I suspect it was probably caused by the time a load of us streaked across the school bathroom complex and I slipped over, crash-landing beautifully on my behind. Well, I was only 11 at the time and you tend to do stupid things when you're stuck in a girl's convent school in the middle of nowhere!

Payback time came 20-odd years later and it caused such awful back problems that I was unable to work for a considerable period of time. A pioneering back rehabilitation programme eventually sorted me out but it wasn't much fun living hand to mouth on state benefits in the meantime. It would have helped if I'd had any sort of rainy day fund or an insurance policy to bail me out because government help is pretty basic.

At the moment, employers must pay Statutory Sick Pay (SSP) for the first 28 weeks of illness. In fact, many employers will continue to pay your full salary for a period of time but they don't have to. They could just pay you SSP of £63.25 a week for the first 28 weeks at which point you have to start claiming Incapacity Benefit. Depending on how long you're off sick this ranges from £53.50 to £70.95 a week although you get a bit more if you've got dependents. It's not a lot, is it?

So, you might be reading this and wondering how you'd pay your mortgage, your bills and your credit cards if you were ill for a long time. After all 25% of men and 20% of women will suffer a serious illness before the age of 65.

To a large extent we at the Motley Fool are big fans of self-insuring for all sorts of things. It's advisable to have easy access savings amounting to between three and six months of your net salary so that, in a crisis, you can fall back on your own resources. I tend to err towards the six months figure myself having been literally on my back for almost a year!

If you haven't got that though, then at least consider some sort of income protection insurance – otherwise known as permanent health/disability/income replacement/accident & sickness insurance depending on what insurers feel like calling it at any particular time. This is especially important if you're the main breadwinner, have got children and/or you're self-employed.

It's worth checking to see if your employer has an insurance scheme in operation – it could be one of the perks of your job in which case you don't have to worry. Otherwise you're going to have to DIY.

Naturally, how much you'll have to pay in premiums is dependent on your age, sex, health, occupation and whether or not you smoke. If you're getting on a bit or you're ill already you probably won't have much luck finding anyone to insure you or, at the very least, the premiums will be larger than you'd like.

A crucial element to consider is when the policy will start paying out. The longer you're prepared to wait, the lower the premiums – which is why a rainy day fund of between three and six months salary can prove particularly useful. You can choose a waiting period of anything from four weeks to a whole year – in the latter instance you'd pay about a quarter of the premiums required for the former so it's a considerable saving.

It's also cheaper if you choose the 'any job' option. If you want to cover yourself simply for not being able to do your own job, it'll be more expensive because while you may not be able to continue as, say, a long distance lorry driver, you might well be able to work in a call centre - in which case the pay-out will stop.

Note that any pay-out is tax-free while you're off work and, importantly, if you choose the right policy, it continues until retirement age, should you find you'll never be able to return to work. It's a depressing thought to end on but, hey, that's life innit?

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