Being ill can cost you less

THE self-employed and the new Nineties workforce on casualised and flexible-contracts get a raw deal in many areas of finance. But arguably there's some good news from insurers offering policies protecting income if you cannot work through accident, ill-health or disability - important cover for the self- employed (and those who have no sick-pay scheme at work).

As a result of an improvement to the tax breaks on these policies, which came into force this weekend, insurers are in effect dropping their prices, albeit while reducing cover for some.

This insurance is called permanent health insurance, or sometimes income replacement or income protection insurance. It is an important area for the self-employed to consider because state benefits are limited for the self-employed and those that may be available (such as means-tested income support) will provide only a low income.

From the new tax year (which started yesterday), policy payouts will be wholly tax-free. Previously they were tax-free only for the first year of any paid claim. As a consequence, insurers have seen fit to reduce their own payouts, thereby allowing them to charge lower premiums. The net effect for such policies is a reduction in the after-tax benefit for the first year of a claim, but broadly the same level of after-tax payout thereafter.

Income protection can be complicated. "Get a range of quotes and read the small print because they are not always straightforward policies," says Phillip Cartwright of financial advisers London & Country.

The cost depends on various factors including your age, sex, the type of work you do and health history, and can vary significantly from one insurer to another. Here's what to look out for when shopping around:

o The level of cover. Most companies now allow you to insure for up to 50 or 60 per cent of your pre-tax earnings. There may be a deduction for state benefits in calculating the potential pay-out.

Companies are not likely to want proof of earnings when you buy a policy, but will if you put in a claim - certified accounts or an agreed tax assessment. There is thus no point in paying higher premiums for higher cover which you won't actually receive.

The variability of earnings of the self-employed can cause problems. If you've had low earnings in the 12 months before you claim, your benefit may be based on those earnings. Check what stance any company takes.

Some policies have the premium and level of cover guaranteed (including guaranteed increases of premium and cover in line with inflation). Others, including unit-linked policies, will review premiums. And if you can't afford the full cover of 50 or 60 per cent of earnings, you can always opt for a lower level.

o The deferred period. This insurance won't help you if you can't work for just a couple of weeks. The earliest a policy will pay out is usually after four weeks' illness. "A deferred period of just four weeks can be very costly," says John Hutton-Attenborough of independent financial advisers Berry, Birch & Noble.

Our table highlights how much you can save - or how much extra you will pay - for selecting different deferred periods.

o Your job. Jobs that carry a higher risk of illness or injury cost more. Some people won't be able to get cover at all. For example, insurers may reject applications from divers, demolition workers, fishermen, or JCB drivers. Some policies cover you if you cannot do your own job (or a similar job) while others cover you if you can't do any job. A policy which pays out if you can't do your own job provides better protection. Where you have "any occupation" cover, the policy may pay something if you cannot earn as much as before in an alternative job. Some policies pay out on an own-occupation basis for a couple of years and then pay out only if you cannot do any occupation.

o The period of cover. If the worst happens, you may be unable ever to work again. So a policy that pays out until retirement offers the best protection. You may be able to choose the period of cover, and a shorter period will be cheaper.

o Health history and lifestyle. Illness or disability from problems you had before taking out the insurance may be excluded or your premium could be raised. The same applies to health problems resulting from a hazardous hobby. Disclose all relevant facts when you apply for cover or your claim may be turned down.

q Next week: how the new tax self-assessment regime affects the self- employed.