Get £100,000 if you can't work

One insurer has paid an average £14,500 per year for seven years to its customers who are no longer able to work.

One insurer says that it is paying its customers for more than seven years after they lose income due to accident or ill health.

Over the past 12 months, insurer LV= paid out more than £12,000,000 to its customers with income-protection insurance who have contracted long-term illnesses. (Note: don't confuse that with payment protection insurance, which is sold with credit cards and with other forms of borrowing.)

The average benefit has been just under £14,500pa, and the insurer is paying out for an average 7.2 years. That's £104,000 per claimant over the course of the illness.

Four-tenths of claims came from musculo-skeletal disorders, cancer and “circulatory systems” and a third from mental disorders. Just 5% were from road or other accidents. A quarter of claims were for disorders of the nervous system and a variety of other problems.

Most people claim successfully

LV= reveals that it rejects 7% of claims, which doesn't seem disturbingly high to me. Just 1% of claims were turned down due to the policyholder failing to disclose something they should have done.

6% of claims are being rejected because the policyholders weren't covered under their circumstances. This shows you should really try to understand the circumstances under which the insurance will pay out before you buy.

Is the price worth it?

Although the insurer wants credit for being honest with its claims figures, it still has not revealed the single piece of information that instantly tells customers if the price is worth the cover: the “claims ratio”.

I have not known an insurer to reveal this figure without heavy arm twisting, e.g. from the regulator. Insurers' usual excuse is that the information might help their competition. Having worked in the industry in a variety of roles, I don't believe that for a second.

However, the latest figures I've managed to piece together indicates insurers as a whole pay out probably back to customers at least 57% of the income-protection insurance premiums they receive.

That already makes the insurance better value for money than buildings and contents insurance, but the real ratio is probably even better than that. If it gets out of the 50% to 59% range and goes into the 60%-69% range, it moves from borderline too expensive up to reasonable value.

Compare that with atrociously over-priced payment protection insurance, which has been typically paying in claims just 10% to 20% of the premiums we pay. On the other hand, car insurance pays out 70% to 79% of our premiums, making it a good value insurance – would you believe!

Life insurance is the real winner, with the industry paying out more in claims than it receives in premiums, making it the best priced insurance I know. The insurers make money by investing the premiums between receiving them and using them to pay claims.

More about income-protection insurance

When you're off work due to accident or illness for a period of time, usually four to 13 weeks, this insurance will start paying a tax-free monthly income, and it will continue paying you until you get back to work.

Mark Jones at LV= said: “While not directly comparable with income protection...data shows that under the Government's new employment and support allowance (replacing incapacity benefit), 93% of applications have not been successful.”

He continues: “Regardless of whether a number of these claims will eventually be overturned under appeal, this sends a clear message that the Government doesn't want and can't afford for people to rely on the state. People must make their own provisions for their financial future.”

Although our incomes are the most valuable things we have, most of us would rather protect our mobile phones and pets first. Yet without income we couldn't afford pets or mobile phones, or anything else.

Some policies pay out only when you can't do any work at all – a condition that many can find hard to meet. Other policies are more reasonable, paying out if you can't do your own job, or if you can't do a job similar to your own. Read the small print carefully.

More: Compare life insurance through lovemoney.com | The dangers of surveys | Insurance policies that pay out – and ones that don't