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Personal finance - the importance of insurance

In the fifth article in our series on personal finance, Shane Stack explains why insurance is important and takes a look at what is available

In the fifth article in our series on personal finance, Shane Stack explains why insurance is important and takes a look at what is available

Most GP's and their families enjoy a comfortable standard of living, and as long as they remain healthy and keep working this should continue to be the case. But what if your health suffers. Worse still, what if you die prematurely?

In an article earlier this year in Pulse I highlighted the benefits that the NHS Pension Scheme (NHSPS) provides for spouses and dependents in the event of ill health or death. Unfortunately the benefits are hugely insufficient when you need them most, i.e. when you have a mortgage and/or dependents.

So let us look at the key areas of protection that all GP's should have.

Locum Expenses Insurance

What is locum expenses insurance?

Most practice agreements state that you will continue to receive your drawings during illness up to a maximum of (typically) 52 weeks. You do however have to provide a locum after usually between 4 and 13 weeks and up to 52 weeks of illness. If you have hired a locum recently you will appreciate the cost involved. The cost varies around the country, but for a full 9 session week the typical cost is around £1,750 - £2,000!

In the past PCT's gave assistance towards this cost depending upon the ratio of full time equivalent partners to the number of patients. This assistance is now fully discretionary and most PCT's admit that, if the budget is already allocated, practices are unlikely to receive any help. Most of my clients don't want to rely on PCT assistance because of this.

Locum expenses insurance is designed to help you meet this cost. Some practices arrange this collectively, others leave it as an individual responsibility.

There are many providers of locum insurance and as with all insurances you need to check the small print to ensure it not only suits your requirements but will continue to provide you with cover and not cease just because you have claimed. Although tempting to go for the cheapest premium, you need to ensure the cover is available in 12 months time and is not just an annually renewable policy, which can be withdrawn to you as an individual or practice.

What should I look out for?

• Make sure the benefits can be tailored to suit your existing practice agreements

• Indexation to allow for increasing costs

• If you happen to be off ill due to stress/anxiety then you want a policy that includes full stress cover and not just a limited payment or restricted clause

• Preferably a policy that does not require evidence of Locum expenditure

• Now that GP's are no longer exempt from jury service - optional jury service cover

• Needlestick injuries covered

• Cover available up to age 65

That's the short to medium term absences covered, but what if you continue to remain off work beyond 12 months? Typically you will get ejected from the practice so your drawings will cease. You may receive some help from the NHSPS ill health retirement scheme however this is not guaranteed and in my client's experience, becoming more difficult to claim. Furthermore the amount you receive depends upon your years of service and as previously mentioned insufficient when you need it most. You therefore need to consider:-

Income Protection Insurance

What is it?

It's designed to pay you an income in the event of you suffering from an illness or injury, whether permanently or not, that results in a reduction or loss of earnings.

• It pays you a tax free income in the event of you being totally unable to work in your chosen profession, directly as a result of illness or injury

• It should commence payment when your salary or practice drawings reduce or cease

• It can supplement any ill health benefits provided by your occupational pension scheme

• Ideally, it should pay an ongoing income, to your chosen retirement age which is selected at the outset, or until you can resume your own occupation

Why is Income Protection so important?

It is a fact that workers in the UK are significantly more likely to suffer from a long term disability than they are to die before the age of 65. There are currently 2.4 million people claiming incapacity benefit in the UK, and of those 73% have been claiming for 24 months or more, and 48% for over four years.

The most common types of long term illness are mental/stress related, affecting 40% of claimants, with 20% being affected by musculo skeletal disorders (source: Moneyfacts Investment, Life and Pensions Magazine, February 2007).

What should I look out for?

• Wherever possible, it is essential to have cover in the event of being unable to carry out your own specific occupation and this aspect cannot be underestimated in identifying cover that fits your exact needs, rather than something that just loosely fits

• Guaranteed premiums ensure you know how much you will be paying not just now but in the future. A reviewable premium means your insurer could increase your premiums in the future because they underestimated the cost of claims. This can be an uncapped increase

• Indexed/increasing cover is essential to ensure in the event of a long term claim your benefits keeps up with increasing livings costs

• Make sure your premiums increase by the same percentage as the cover mentioned above as some insurers impose an additional premium as you get older

• Examine the claims payment record of your insurer, this will provide some insight on their ability to settle claims efficiently

• Above all look at their terms and conditions as you want a comprehensive contract which includes needlestick injuries and with few exclusions

Ok so your income is now protected but can you continue to pay your ever increasing mortgage from this much reduced income. Furthermore if you die, your dependents household income will be severely reduced or if you are not married, it ceases altogether.

You therefore need to consider:-

Life Assurance & Critical Illness Insurance

What is Life Assurance?

A lump sum or regular income payable in the event of death within a specified term. Benefits are normally tax free and can be used for:

• Family Protection to maintain the family's standard of living and aspirations

• Mortgage Protection to clear or reduce outstanding mortgage debt

• Inheritance Tax Planning to provide funds via a trust to help mitigate inheritance tax liability upon death

Life assurance policies tend to fall into two categories:

• Protection Policies designed to provide cash tax free in the event of death only

• Investment Policies to provide cash in the future not just in the event of death, but as a result of structured savings

Luckily there are not too many things to look out for when buying life cover apart from:

• ensuring it's a reputable company with a track record in paying claims

• avoiding one of the main pitfalls most people suffer and that's potentially paying up to 40% inheritance tax on life assurance. You should always write a life assurance policy in trust, advice you typically don't receive when buying it from a supermarket or online!

Significant reductions in the cost of life insurance cover over recent years means if you have old policies you could probably increase your cover now for the same premium.

What is Critical Illness Insurance?

A critical illness plan pays a tax free lump sum if you are diagnosed with a specified medical condition, or become totally and permanently disabled during the term of a policy.

Every year more than 600,000 people in the UK suffer a critical illness. The majority survive.

• Heart attacks - more than 150,000 people suffer their first heart attack. Over half survive at least a year. (Source: British Heart Foundation)

• Stroke - some 120,000 people suffer strokes. About 70% survive at least a year. (Source: Chest, Heart, Stroke Foundation.)

• Cancer - about 250,000 people are diagnosed with cancer. About 40% survive at least five years. (Source: Cancer Research Campaign.)

• Multiple Sclerosis - there are now about 85,000 sufferers of MS in the UK. (Source: Multiple Sclerosis Society.)

• Kidney Failure - some 100,000 people presently suffer from kidney disease. About 500 new cases are diagnosed each year. (Source: Munich Reassurance)

What should I look out for?

As with Income Protection:

• Own occupation as opposed to suited or any occupation for the permanent total disability clause

• Guaranteed Premiums

• Indexed premiums/benefits

• Good claims payment record

• Terms and conditions/exclusions

The above information is, of course, generic. Each individual's circumstances differ. If you want specific advice then do not hesitate to seek independent financial guidance from a medical specialist independent financial adviser.

Shane Stack is a partner at Medical Money Management, specialist independent financial advisers to the medical profession. Email shane.stack@mmmnet.co.uk Website www.mmmnet.co.uk Medical Money Management is authorised and regulated by the Financial Services Authority.

You can ask your own questions of Shane via our Ask the Expert service.

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