Though it is not really life insurance, permanent health insurance is issued by many life insurance companies and is, unlike fire or accident insurance, a long-term contract. In return for an annual premium the company guarantees to pay a specified annual income to the policyholder if he or she is unable to work as a result of illness or disablement. The contract runs to retirement age, normally 65 for men and 60 for women, though if earlier retirement is intended the term may be shortened. Since the policies provide no life insurance benefits, no tax relief is allowed on the premiums.
A number of basic conditions are stipulated by all the offices issuing permanent health insurance (PHI) policies.
The maximum proportion of earnings that may be insured as an annual benefit is usually about three-quarters.
Some illnesses (particularly those resulting from excessive use of alcohol or drugs) are excluded.
If the policyholder is able to work only at a different, less well-paid, occupation, only a proportion of the annual benefit will be payable.
Premium rates relate not only to age and health (with great attention being paid to medical history, especially if the policy is substantial) but also to occupation, some high-risk occupations being subject to a heavy extra premium. The premium is also determined by the period of illness that has to elapse before the benefit becomes payable. This "deferred period" may be 4 weeks, 13 weeks, 26 weeks, and even up to 104 weeks, and the premium is obviously much lower for the longer deferment. "Waiver of premium", so that no premium is payable during a claim period, is normally included.
The variation in exact wording of PHI contracts can be very significant. For example, the exact definition of "mental illness" varies and could prove important to the policyholder. Likewise, some companies may pay the full agreed annual benefit less whatever a disabled policyholder may earn, while others may pay no benefit if there is no difference in the type of job the policyholder is doing, even if he is earning materially less as a result of his disablement. It is therefore important to be advised on PHI by someone who is familiar with these variations.
Whereas in ordinary life insurance women's longevity provides them with an advantage over men, in PHI their susceptibility to illness puts them at a disadvantage. According to the statistics at least, women are far more illness-prone, and the premium rates for women are up to 70% higher for similar PHI cover.
The main class of person to whom PHI is particularly relevant is the self-employed. Unlike those in employment, they have no contract of employment specifying that salary will be paid during three or even six months' illness, nor are they entitled to the State benefits that employed people can obtain. However, any employee earning significantly above the national average wage will also find that the State benefits in a prolonged period of illness or disablement fall well below their earnings. For this reason some employers now have bulk PHI contracts covering all their management staff - a very worthwhile "fringe benefit".
Even if the total cost of such a "package" marginally exceeds the cost of the elements if purchased separately, such a policy may be the best way to acquire the benefits you want, though obviously you should assess this carefully. However, the other element often included in such packages is a long-term savings policy, either a with-profit endowment or whole-life policy whether in conventional or unit-linked form.
If the package is presented as a whole it can sound very appealing in sales literature.
But if it is protection you need, then you should carefully consider the extent... see: Insurance Example 6 continued