Peace of mind at the right price

Have you ever worried about how you would pay your bills if you were unable to work? Well, worry no more...

Insuring your income if you can't work can be a tricky business. For one thing, the policies on offer are complex, and the level of protection varies greatly from one plan to another

On top of that, insuring your income tends to be a lot more expensive than insuring your life. That's because the chances of being unable to work for a time because of ill health are far higher than premature death.

So, I'm going to walk you through the different policies and show you how to avoid paying over the odds.

Avoid PPI

If you missed the whole payment protection insurance (PPI) debacle, here's a quick reminder. PPI is an insurance policy which is designed to cover your repayments on a loan, credit card or mortgage if you're unable to pay them yourself following sickness, accident or unemployment. You can also take out PPI policies which replace some of your income if you're not in work for any of these reasons.

Sounds fine in theory, but PPI is overpriced for the protection it provides, widely mis-sold and difficult to claim against.

Is PPI really as expensive as they say?

The cheapest policy I can find is £10.90 a month. That may not sound a lot, but how much cover do you really get for that premium?

This policy covers you for accident, sickness and unemployment, and if you manage to make a successful claim, you'd receive a payout of £1000 per month. But, the policy only pays out for six months. So, the maximum claim would be just £6,000. Worse still, you'll have to wait 180 days (six months!)   before you start receiving any benefits.

Suddenly, £10.90 doesn't seem such a great deal when you realise how little protection you actually get.

You can cut the cost to £5.80 a month by removing the unemployment cover. Again, that sounds cheap, but I'm still not sold. Imagine you don't recover enough to resume working after six months. You would end up high and dry with no replacement income.

I think long-term cover makes far more sense. Here are some suggestions:

Critical illness cover (CIC)

Critical illness cover (CIC) pays out a lump sum if you're diagnosed with one of the critical illnesses covered by the policy. This normally includes:

• Certain types of cancer
• Heart attack
• Kidney failure
• Coronary artery by-pass surgery
• Major organ transplant
• Stroke
• Multiple sclerosis

Most policies also protect against a range of extra conditions in addition to those listed above, such as Parkinson's Disease and Motor Neurone Disease as well as blindness, loss of limbs and paralysis.

Policies do vary, so you'll need to check the small print carefully to find out exactly what conditions are covered. Some are more comprehensive than others.   

Remember, you don't necessarily need to lose your income to make a successful claim under CIC. If you feel well enough, you can continue working, and still receive a payout.

How much is CIC?

Using the lovemoney.com life insurance engine, the cheapest guaranteed premium I can find is £39.94 a month. This provides cover of £100,000 over 25 years.

This is undoubtedly more expensive than PPI. But remember the total cover here is £100,000 to help replace your income, whereas you'd only get a maximum of £6,000 under the PPI plan. So CIC is far better value for money, in my opinion.

Get life and CIC together

Standalone CIC policies aren't as widely available as plans which combine life insurance and CIC in one plan. Bizarrely, the cheapest combined policy comes in at £38.53 a month, which is less than CIC on its own. So, it may seem like a no brainer to buy both insurances together.

Just be aware that, if you bought these policies separately, you could potentially make a claim for CIC while you're still alive, and then your family could also make a claim on the life insurance policy on your death. If you get a combined policy, the insurer will only pay out once, under either the CIC or the life insurance element of the policy. 

Income protection insurance (IPI)

If you're concerned you may suffer an illness which prevents you from working but isn't covered by CIC, think about income protection insurance (IPI) as an alternative.

IPI replaces part of your income until you're ready to return to work. The maximum benefit is normally between 50% and 65% of your salary. You can insure against any illness or accident which stops you from working. If you're never well enough to work again, IPI will pay out until you reach normal retirement age.

That said, you'll need to wait until the 'deferment period' is over before you start receiving benefits. Typically, this lasts for 13 weeks. Shorter or longer deferment periods will drive the premiums up or down accordingly.

How much is IPI?

Most IPI policies will cover you if you're unable to do your own job. But you can reduce the cost by taking out a policy which covers you if you're unable to do any job which is suitable for your level of education, training and experience.

Alternatively, you can go for policy which only covers you if you're incapable of working in any capacity regardless of your profession prior to the illness or accident. This will be a lot cheaper, but I don't think it provides enough cover.

In terms of guaranteed premiums to cover you for your own job, let's assume you're a professional earning £30,000. If you're 35 now and you want cover in place until your 60th birthday, the cheapest IPI policy would cost £21.43 a month. This provides a monthly pay out of £1,250, although you'll need to wait 13 weeks before you see any cash.

Given that the policy could potentially pay this amount every month for the next 25 years, it looks pretty competitive to me, and it's cheaper than the CIC quote.

Before I finish, here are two things to remember: firstly, the premiums shown are standard costs for a healthy policyholder. The actual premiums you pay could be higher. Secondly, all policies carry exclusions that prevent successful claims. Make sure you understand the limitations before you apply.

Note that all premiums shown are for a male age 35 who is in good health and a non-smoker.

Compare life and critical illness quotes at lovemoney.com

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