Unlike serious illness cover, which pays a lump sum for specific illnesses, permanent health insurance will pay out for any illness that prevents people working, writes Laura Slattery

If illness or an accident means you suddenly have to give up working, income protection insurance can provide a monthly wage until you are able to return.

But this type of insurance, commonly known as permanent health insurance, is not something that people tend to take out.

Some will know that their employer will provide a form of ill-health insurance for them under their company pension scheme or feel that their paid sick leave entitlement is enough to cover most eventualities.

More still will rely on their partner's income or State disability benefit, currently €118.80 a week at its highest rate. Finally, there is serious illness cover, which insurance companies promote alongside their life assurance products.

The Irish Insurance Federation (IIF) has produced a consumer information leaflet explaining the main differences between permanent health insurance and serious illness insurance (see panel).

"There was some confusion between the two," says Ms Jennifer Hoban, life assurance manager at the IIF. "People do tend to talk about the two of them in the same breath."

Serious illness insurance pays out a tax-free lump sum to people when they are diagnosed with a condition listed on the terms of the policy. The majority of payouts are for cancer, heart attacks and strokes.

Permanent health insurance is different. It will replace your income if you are unable to work due to long-term illness or disability.

The monthly payouts are limited to a proportion of your income, usually either two-thirds or three-quarters, to prevent a situation where people are better off sick than working.

The income is taxable, but premiums up to or equalling 10 per cent of your income are subject to tax relief. Payouts will start after a deferred period of either 13, 26 or 52 weeks and continue until you are judged fit to return to work or until retirement age.

The longer the deferred period you opt for, the cheaper your premiums will be. Women pay higher premiums than men, because they are more likely to claim for longer periods of time.

Last month, Which?, the magazine published by the Consumers' Association in the UK, described income protection insurance as a vital supplement to statutory sick pay and said it should be a financial priority for people not covered by similar benefits at work. The report estimated that just 12 per cent of the UK population had this type of insurance.

In Ireland, it is a small market for insurers. Irish Life, Hibernian Life & Pensions and Friends First are the three main providers, although Eagle Star also provides it on a group basis for employer-sponsored schemes and for individuals as part of an overall pension package.

"The real people who will take this out are self-employed," says a spokeswoman for Hibernian.

Last year, there was just under €2 million from new business premiums for individuals and €16 million from new group business. Serious illness is way ahead.

The new business market for serious illness or products containing a mix of life and serious illness cover was valued at €42 million in 2001.

While serious illness insurance policies may be restricted in the number of illnesses they actually cover, permanent health insurance will pay out for any illness or disability that prevents you from working. "It's a general catch-all insurance," says Ms Hoban.

But permanent health insurance is restricted in a different way. "Not all categories of worker can get it," explains Ms Hoban. "Occupations with a high manual element or an occupation where there has been a lot of claims might not be able to get it."

Under Friends First's Income Protection Plan, for example, examples of people excluded from cover "due to the nature of the job" are members of the armed forces, bodyguards, cabin crew and excavators.

People with certain occupations will be given cover at a higher premium rate. Insurers will class workers into different categories, usually ranging from one to four. "One would be an office worker, two might be someone who travels by car a lot, three might be an electrician and four would be a builder," says the spokeswoman for Hibernian.

Under Irish Life's Income Protector plan, a male in occupation Class 1 who is 35 on his next birthday could have a benefit of €300 a week for a €25.38 monthly premium, based on a deferred period of 13 weeks and a retirement age of 60. In Occupation Class 4, the same cover costs €58 a month.

Car mechanics would be "severely rated", according to Ms Patricia Nolan, manager of life technical services at Irish Life, and chefs and taxi drivers will also pay more.

"The loading on taxi drivers is to do with backs. Backs are a big source of claims, and people with bad backs are unlikely to be able to drive," Ms Nolan says.

In 1998, the Insurance Ombudsman referred to backs as "a grey area" for insurers and warned that permanent health insurance was not always permanent.

Policy-holders might sufficiently recover from back injuries and disputes can arise if benefit is stopped after some years when the company believes the claimant is fit to return to work.

In most cases, claims will be reviewed regularly and the claimant will have to produce medical reports saying they are unfit to work.

It is important to check whether an income protection policy will pay out if you are unable to carry out your "own occupation" or if you are just insured against being able to carry out "any occupation".

For example, an electrician could damage his or her hands and be unable to carry out maintenance work but might be deemed fit to work in an administration role. Or a surgeon might damage his or her hands and be unable to carry out operations, but could continue as a general medical consultant for a lower salary.

Most insurers will cover the difference between the lower salary and the maximum benefit that can be granted under the policy.

At Irish Life, for example, maximum benefit is 75 per cent of pay less any social welfare disability entitlements. "If you have a job that pays €100,000, the maximum amount you would get is €75,000. But if you are able to return to another job, one that pays €50,000, you will receive the difference. The benefit paid would be €25,000," says Ms Nolan.

But for people who are judged unable to continue working in any role, permanent health insurance pays out for a wider variety of illnesses and disabilities than serious illness cover, providing a steady income of particular benefit to self-employed people.

"If you suffered a problem with your back, there would be no serious illness cover, but you could be out of work for a year," says Ms Nolan.

"With serious illness cover you get a lump sum, and it's not taxable, but you might end up having to live off it."