IPTM6105 - Sickness disability and unemployment insurance: types of policies

The word ‘policy’ is used throughout the following text but it should be read to include friendly society contracts where appropriate.

Permanent Health Insurance

Permanent Health Insurance (PHI) was originally designed to enable individuals, particularly the self-employed, to protect themselves against the risk that illness or disability might prevent them from continuing to earn a living. Some policies also helped with the cost of paying someone to carry out domestic duties if the policyholder's partner was unable to do so because of ill health or disability.

It was called permanent because once the policy was effected the insurer was locked into providing cover at a set price right through to retirement age irrespective of the claims record. Later insurers began to offer only policies that allowed them to review and increase premiums at certain intervals to reflect claims experience.

Today policies may be taken out for short periods, to serve a particular need, or for longer. For the purposes of the tax exemption the period of the policy is not relevant, but it does have relevance for the way in which the insurer is taxed on the business. For more details on this, see the Life Assurance Manual (LAM).

Some policies only offer benefits for a limited period however long the absence from work lasts. Other policies defer benefits for a period after the person first stops work. The length of this period, known as the deferred period, may be determined by what other benefits the person can claim and for how long.

Once started, policy benefits may continue to be paid until the insured person reaches normal retirement age, if they have not been able to resume work in the meantime. Benefits will usually, though not always, stop at retirement age.

The earliest forms of PHI were policies taken out by individuals. Later, PHI was extended to include group schemes taken out by employers to pay sickness benefits to their employees.

PHI policies are often referred to as ‘income protection’ or ‘sickness insurance’ policies.

Employment or income protection policies

These policies pay benefits in the event of the policyholder becoming unemployed or unable to carry on in self-employment. They are less common than PHI policies and may be referred to by different names.

Mortgage payment protection insurance

These policies, not to be confused with mortgage protection (life insurance or endowment) policies, are designed to pay the borrower’s monthly mortgage commitments in the event of illness or unemployment, although usually only for a maximum period of one or two years. They are often referred to as accident, sickness and unemployment (‘ASU’) policies.

Creditor insurance

These policies fulfil much the same economic function as mortgage payment protection insurance, but pay off debts on credit card and other types of loan or HP agreements in the event of illness or unemployment. Some policies also meet outstanding commitments in the event of the person’s death.