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Protecting yourself and your family beyond the NHS

Doctors who are focused on the health and wellbeing of their patients also need to remember to look closer to home. While the NHS offers doctors some valuable benefits that will protect their family from unforeseen events, they may need extra cover; this could be crucial if they were to fall ill and are unable to work for an extended period of time – or in the event of their death.

As circumstances change what should Doctors look at when considering their protection arrangements?

Sick pay explained

As a starting point, doctors must first get to grips with what the NHS offers. If you are employed and fall ill, you will be able to claim full pay for a period of time, the length of which varies according to your length of service

You are entitled to the following sick pay:

 During the first year of service One month’s full pay and two months half pay
 During the second year of service Two months full pay and two months half pay
 During the third year of service Four months full pay and four months half pay
 During the fourth and fifth years of service Five month’s full pay and five months half pay
 After completing five years of service Six months full pay and six months’ 

Ill-health retirement

As a doctor and member of the NHS Pension Scheme, you are entitled to apply for ill-health retirement and, if your application is successful, will get either “Tier 1” or “Tier 2” benefits, depending on the circumstances of your ill health.

Tier 1 benefits are for doctors who can prove they are unable to perform in their job because of their ill health. They can claim NHS pension benefits based on the value of the benefits they’ve built up so far with no reduction, but with no opportunity to claim an enhancement either.

Tier 2 benefits are for doctors who meet the Tier 1 rules but whose ill health is serious enough to mean they can’t do another job of similar duration to their NHS role. Since April all members have joined the 2015 NHS Pension Scheme and this provides an entitlement of Tier 1 benefits, plus an enhancement based on one half of potential benefits at normal pension age which is State Pension Age in the 2015 Scheme.

Bear in mind that if you’re unable to prove permanent ill health based on the NHS’ Tier 1 or Tier 2 definitions, you won’t be able to claim Ill Health Retirement, which will leave you dependent on state benefits and any savings you may have built up.

This is one reason why income protection insurance should be strongly considered, as very few people have adequate savings to replace their income in the long-term. It is essential that any cover is arranged on an ‘own occupation’ basis. This simply means that, in the event of an illness or accident that renders you unfit to carry out your own job, that you are not in a position where you have to find other non-related work that may not require the same level of skill or training.

Anyone who currently holds income protection need to also review their policy as it’s likely that the policy was set up to age 60 for members of the 1995 Section or age 65 for those in the 2008 section.  On joining the 2015 scheme any income protection should be reviewed in line with the revised normal pension age which is State pension Age.

With a successful income protection claim If you’re unable to work due to accident or illness, you’ll receive a tax-free monthly amount to cover a proportion of your normal income. The maximum percentage of your pre-tax salary you can select is usually 55-65%. Even if you pay for more cover you will still only be able to claim the maximum so if you have reduced your salary (maybe recently changed to Less than full time) then you need to review your cover.

Death in service benefits

If you die while you’re still employed as an NHS doctor, your family is entitled to death-in-service benefits worth approximately twice your pensionable pay.  Your spouse or qualifying partner is also entitled to a pension for six months following your death based on your pensionable pay at that time.

NHS Pension Scheme members of more than two years’ standing have additional benefits here. Your spouse, civil partner or nominated qualifying partner will receive an adult’s dependant’s pension for life worth half the amount of the Tier 2 ill-health pension benefits you were entitled to at the time of your death. Generally, only memberships since 6th April 1988 count for the purposes of working out this benefit, though this restriction does not apply to widows of male doctors.  Your children are also entitled to receive benefits.

Do you need more?

These benefits offer strong foundations on which to build, but many doctors will need additional protection to be confident that their families are well provided for; for example, that a mortgage or other debts can be paid off and that their standard of living will not suffer. Insuring your income against ill health provides important reassurance while good quality critical illness and life insurance will also offer comfort. So what protection should Doctors be considering alongside their NHS benefits:

Life Insurance

Life insurance pays out a tax-free sum to whoever you choose if you die during the term of the policy. Life insurance covers you for a specific term, or amount of time. This is often the same amount of time as your mortgage, for example. You’ll only pay a premium for the term of your policy, and you’ll only be covered if you pass away during that term. We have identified below some different types of life insurance:

Level Term

Premiums stay the same for the whole term. Payment is made if you die during the term. The term is also fixed. This type of policy is useful for providing security for your dependents up to a certain age.  Can also be used to protect an interest only mortgage.

Decreasing Term

Life cover decreases during the term of the policy. This type of policy is useful to cover a reducing loan, such as a repayment mortgage, if you die during the term. This type of cover is cheaper than level term due to the cover reducing each year. The amount your estate gets back is normally based on a table set out when the policy starts. Depending on mortgage rates over the period of the mortgage, this amount might not exactly match the balance outstanding on the mortgage.

Increasing Term

The level of life cover increases over the term to keep up with inflation. The cover is increased each year throughout the term, without further medical evidence. Increases in cover are based on either a fixed rate for example 5% each year, or in line with an indexed rate for example the Retail Prices Index (RPI) or another similar measure of changes in the cost of living. Premiums will be higher than level term and will increase as the cover increases.

Renewable Term

Initially taken out for a short term for example one to three years, this product allows you to extend the cover for further set periods without additional health questions. The premium will be low to start with but will then increase to reflect your older age when each extension starts. Term extensions are allowed up to a maximum age, typically 75 years.

Family Income Benefit

In the event of your death, this type of policy will pay a regular tax-free income to your dependants for the rest of the policy term. There is a guaranteed death benefit that is the minimum to be paid as an income in the event your death during the term. If you survive until the end of the policy, no payment will be made.

This will replace the income that would be lost on your death, to cover outstanding loans, monthly expenditure or potential childcare costs.

For example, if a £10,000 per year family income benefit plan over 25 years is chosen, and you die at the end of year 8, then your dependants will receive £10,000 every year for the rest of the term which would be 17 years.

Life Assurance:

Like life insurance, life assurance pays out a tax-free sum to whoever you choose when you die. However, life assurance usually covers the policyholder for their entire life – so it’s also known as ‘whole of life’ cover. Unfortunately, death is one of life’s certainties, so as long as premiums are maintained a pay-out is guaranteed – meaning that premiums for life assurance policies tend to be higher than for life insurance policies.

Critical Illness:

This cover is often an add-on benefit to your term insurance policy. It will pay out on death or diagnosis of one of the critical illnesses covered by the policy. At the end of the term, if you have not become critically ill, no payment will be made.

Critical illness cover will give you peace of mind in circumstances where you or those who depend on you, would face financial difficulties if you became critically ill (for example if you had cancer, a heart attack or a stroke).

Many policies also provide some critical illness cover for children up to their 18th birthday or 21st if in full time education. Different policies cover different critical illnesses. Each policy will only cover the illnesses set out in its terms and conditions, and no others.

What about Trust Arrangements?

A trust, in very basic terms, is a legal arrangement that leaves your assets, including your life insurance policy, in the hands of a trusted person or trusted people.

These people – aptly named the ‘trustees’ – look after those assets, including your policy when you pass away and ensure that any pay-out is divided out between your loved ones (your beneficiaries) at the appropriate time, according to your wishes.

Basically, this means that, once the trust is set up, the named trustee will legally own your life insurance cover.

The Benefits of a Trust Arrangement

The pay-out may not be subject to inheritance tax and Trusts can make it easier for your loved ones to access your life insurance money more quickly by avoiding probate*.  Its worth noting that the pay-out is better protected from creditors – it won’t automatically be used to pay off debts

*Probate is the legal process for dealing with the estate of someone who has died. An estate, in this case, relates to the money and property of the deceased. If the deceased left a will, they may have specified an executor or executors. These are people who are expected to “execute” the will.

Every family’s circumstances are different, so it is vital to take independent financial advice on the type and level of protection you need.

Content correct at time of writing and is intended for general information only and should not be construed as advice.

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