FOOL SCHOOL
Health Insurance Basics

August 16, 2002

Most people only insure their lives, so their families will only get a payout if they die within the term of the insurance. But what if you were to become seriously ill or disabled while your family are still dependent? At the moment, less than two in a hundred households are insured against serious illness or disability.

You are far more likely to survive cancer, a heart attack, or even a nasty accident at work than you were twenty years ago. Think it couldn't happen to you? Consider for a moment whether or not you know someone laid up because of a joint injury or back problems -- perhaps related to a car crash. Even pregnancy can be a disabling condition.

Of course you know people who are off sick long-term and you should certainly consider some insurance in case it happened to you. There are two schemes available. One is the income protection policy and the other is the critical illness policy.

The major difference between Income Protection (IP) and Critical Illness (CI) insurance is that IP insurance pays out whatever the reason for your being unable to work (subject to one or two exclusions). CI insurance only pays out if you contract one of a list of specified illnesses (even if the list is pretty long). IP also just pays out for the period that you are unable to work, as opposed to CI insurance, which generally pays a straight lump sum.

So what's keeping you from taking out either type of policy? Money. This type of insurance is expensive, for the simple reason that you are far more likely to claim on it than you are on a life policy that pays out on death. Single people should target their cash at income protection, not life insurance. But homes with two breadwinners should also consider one or other type of policy if you think you won't be able to manage on just one income. Imagine caring for a disabled partner long-term. You would have to give up your job or spend most of your income on paying for professional help so some extra income or a lump sum might come in useful at such a time.

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