Payment Insurance Explained

What will it do?

Redundancy or incapacity that prevents us from working can strike any one of us at any time. And one of your first worries will be - how will I pay my bills? Payment insurance - or payment protection insurance to give it its full title - can be the solution to nip any worries in the bud before it happens.

It will provide you with a replacement income with which to pay the household bills, or specific cover for particular commitments like mortgage repayments or other borrowing, in the event of your being unable to work because of an accident, sickness or due to involuntary redundancy.

These will be in the form of monthly tax free payments.

So, I need to have a mortgage, a loan or credit card to qualify for payment insurance?

Not necessarily. Provided you have an income from regular employment, payment insurance can provide a replacement income in the event that you fall ill and are unable to work for a significant period of time - no mortgage or other borrowing commitment is required.

How long would I need to be off sick or unemployed?

Different insurers have different qualifying periods before entertaining claims under such policies. Probably the most typical period is 30 days - once your incapacity to work or unemployment has lasted longer than this period, the insured benefits become payable - although some policies can stipulate a qualifying period of up to 90 days.

A further difference between policies is that some treat this qualifying period as a form of policy excess in so far as any loss of earnings during that time have to be borne by the policy holder, while others will backdate the benefits payments to the first day of incapacity once the qualifying period has been exceeded.

What if I succumb to a long-term illness?

Payment insurance policies are essentially designed to provide relatively short-term financial relief and support during a recoverable illness or period of unemployment likely to keep the policy holder off work for between one and twelve months. Therefore, the insured benefits are paid every month until the policy holder is well enough to resume work / find alternative employment or for up to a maximum period of 12 months. Although some policies will offer the option of extending this maximum period to up to 24 months, if the prospective policy holder's principal concern is to buy cover against the risk of a long-term, critical or serious injury, then he or she is probably better advised to seek specialist advice regarding critical illness or permanent health insurance.

What level of protection insurance should I buy?

This is, of course, largely a matter of personal choice, taken in the light of the monthly premiums that can be afforded. If the primary concern is to ensure the continued repayment of a mortgage or other borrowing during times of incapacity for working, then the decision is relatively straight forward and determined by the level of monthly repayments that need to be made.

If a general replacement income is required, however, then this will rest more on the policy holder's best estimate of the monthly income on which he or she can get by. Although the actual amounts will vary from insurer to insurer a typical maximum level of payment insurance cover will be 50% of normally earned income, or £1,500 a month, whichever is the lesser.