WARNING: Do not
rely on the state to provide you with a reasonable income if
you were unable to work for a long period due to illness or
disability. You have to pass strict medical tests to qualify
for incapacity benefit. The alternative "means-tested income
support" does not give you much to live on.
Do you need to protect your income in case of illness?Protection from the state in case of illness:Most people assume that the state provides a safety net to catch anyone who is unable to earn a living and has no other income to rely on. After all, is that not why we pay National Insurance? However, you might be surprised at how little the state would provide if you could not work because of a long-term illness or disability. Since April 1995, the main help you can expect if you are off work sick is incapacity benefit. For the first 28 weeks:No benefits are payable for the first three days of illness. After that, most employees qualify for Statutory Sick Pay (SSP), which is paid by your employer. If you are self-employed or you are an employee who does not get SSP and provided you have paid enough National Insurance contributions, you can claim the lower rate of short-term incapacity benefit. In 2000-2001 this was a tax-free £50.90 a week. There is no extra if you have children. You can claim an increase for your husband, wife or partner, but only if
During this first stage, you can qualify for incapacity benefit because you are unable to do your normal job; you will need sick notes from your doctor. However, from week 29 onwards, you must pass a strict medical test. In the past, this has been called the 'all work test' but it has being renamed the 'personal capability assessment'. In both guises, it looks at your ability to perform certain functions, such as standing, seeing and reaching. You'll have to be found incapable of doing any work, not simply your normal job, in order to continue getting benefit. The personal capability assessment also focuses on what work you could undertake, despite your illness or disability. From week 29 to week 52:Provided they satisfy the medical assessment, both employees and the self-employed switch to higher-rate short-term incapacity benefit (£60.20 a week in 2000 -2001). Although the amount is higher, it is now taxable. This means that, if you have income from other sources, you could actually receive less than you did during the first 28 weeks. If applicable, you still get the increase for your partner. You can now also claim extra (which is tax-free) for any children in your family:
These additions for children are lost or reduced if your husband, wife or partner earns more than a given amount (£145 a week in 2000 -2001 if you have one child, increased by £19 for each additional child). After a year:You switch to long-term incapacity benefit (£67.50 a week in 2000 -2001). If you are terminally ill or you are very severely disabled, you can get this rate of incapacity benefit from the twenty-ninth week onwards. There is also an increase if you are under age 45 at the start of the illness. If you are under 35, you get an extra £14.20 a week in 2000 -2001. Between the ages of 35 and 44, you get less - £7.10 a week in 2000 -2001. If you have children, you still get extra for your husband, wife or partner, though this is paid at a higher rate than previously (£40.40 a week in 2000-1) provided he or she earns no more than £52.20 a week. The same additions as before are payable in respect of children. Benefit (apart from increases for children) continues to be taxable. Long-term incapacity benefit is not payable if you are over state pension age, but you will usually qualify for state retirement pension instead. Other help from the state:Various benefits are available if you are deemed to be long-term disabled. Whether or not you get illness, disability or related benefits, if your income is low, you might qualify for means-tested benefits to top up your income. If you are available for work, this will usually be non-contributory Job Seeker's Allowance. If you are not able to work, you might be able to claim income support. You will not be able to get means-tested benefits if you have savings of more than £8,000 (or £16,000 if you live in a nursing or residential home). The benefit you get will be scaled down if your savings are less than this but still more than £3,000 (£10,000 if you live in a home). How much help from the state?Precisely what benefits you will qualify for and how much help you get will depend on your particular circumstances. It is estimated that a single-earner couple with two children would get about £7,000 a year if the breadwinner fell ill and couldn't work. Reductions in incapacity benefit:From April 2001, any incapacity benefit you might have qualified for, will be reduced if you have income from pension schemes (which could be personal pensions, stakeholder schemes or occupational schemes) or income protection insurance (either your own policy or cover provided by an employer). This income exceeds a given threshold. In 2000-1, the threshold was £85 a week. For every £1 of such income above £85 a week, you will lose 50p of incapacity benefit. Also applicable from April 2001, all new claimants for incapacity benefit will be required to attend a work-focussed interview. This aims to identify work you could apply for and to help you draw up a plan for getting a job or starting your own business. If you refuse to attend the interview, your benefit may be reduced or lost. Why do you need income replacement insurance?It is estimated that you are 20 times more likely to be off work for six months because of sickness or injury than you are to die before reaching retirement. Few people question the need for life insurance to protect their dependants if they were to die, but only one working person in ten has any specific long-term financial protection if they are unable to work because of sickness. Government figures show that about one in five people report having an illness or disability that limits their activities and about two million people each year claim benefits for long-term sickness or disability. Few people would find it easy to cope with the financial impact of a prolonged illness. So why is this area of financial planning so often neglected? There are three main reasons:
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