Money: Who'll pay the bills if you fall ill?

Your insurance policy, of course - if you've picked the right one.

Here is a question to strike fear into the heart of anyone with a sizeable mortgage, a loan, a huge credit card balance or a pension: if you fell ill or became unemployed, how would you pay off your debts?

One answer is accident, sickness and protection insurance (ASU), available from mortgage lenders. Indeed, quite a few make many of their deals conditional on taking out ASU.

While there may be some exceptions, the average cost of such policies runs between pounds 5 and pounds 7 a month for every pounds 100 of monthly outgoings. Take- up remains low, however, despite changes in October 1995 in the way mortgage interest benefits are paid to people who lose their jobs. Any home loans taken out since that date do not qualify for state benefits for the first nine months a person is out of work.

Cost is one reason why many borrowers fail to take out ASU cover. A second reason is that lenders have indicated they are prepared to take a reasonably soft line with borrowers who will be entitled to state benefits after nine months, merely adding the interest owed to that person's outstanding capital debt.

Even so, ASU insurance remains the Government's preferred route to self- protection. Earlier this year, Hilary Armstrong, the Housing Minister, appeared to lambast the mortgage industry for not selling enough of these plans - despite protests from lenders that she risked sparking off a new mis-selling scandal to rival the one surrounding personal pensions.

It is possible to obtain cheaper cover. Berkeley Alexander's Premium Mortgage Contract charges pounds 4.75 a month per pounds 100 of outgoings for unemployment and disability cover, subject to a 90-day waiting period. It also offers 25 per cent of additional benefits free. GRIP, whose cover is underwritten at Lloyd's, charges pounds 5.50 a month, subject to 60 days' notice.

What if it's just unemployment you are worried about? Both Berkeley Alexander and GRIP offer unemployment-only cover. Berkeley charges pounds 2.75 per pounds 100 each month, again with a 90-day exclusion. GRIP's charge is pounds 3.50 a month (with six months' free cover thrown in) with a 60-day notice period.

Financial advisers, however, remain unimpressed by ASU policies, arguing that they are too confusing in terms of who is covered and who is not, for them to be useful to many people. Colin Fitch, a financial planner at Corporate and Personal Planning, fee-based advisers in Colchester, says: "The danger with unemployment policies is that they may not offer much cover to people who are self-employed. Generally, our advice is to have an emergency fund that would tide you over the first few months if you lost your job. For sickness, permanent health insurance (PHI) is more suitable."

Of course, income replacement policies such as PHI make sense. But what if you simply want to cover things such as loans, credit card bills and pension payments?

Pension providers will almost always offer "premium waiver", whereby your payments are paid if you are unable to work because of illness. Scottish Equitable, for instance, charges 2.5p for every pounds 1 covered, while Axa levies 3p for every pounds 1. As for credit cards, each issuer has its own protection. For instance, Barclaycard will pay up to pounds 1,000 a month on outstanding debt for up to 12 months, if a customer has been off work for 14 consecutive days. The cost is 7p for every pounds 100 outstanding.

Personal loans also offer payment protection cover. Midland Bank would charge pounds 14.49 a month to protect a pounds 2,000 loan at an interest rate of 16.9 per cent APR, bringing the total cost to pounds 195.69. A pounds 10,000 loan from Midland over 50 months would cost pounds 42.45 a month to protect. But you must be "involuntarily" unemployed, and you have to wait for 60 days before claiming.

Are these policies worth taking out? Not according to many independent financial advisers. Andrew Ferguson, regional investment manager at Whitechurch Securities, in Bristol, says: "The problem is that they only cover a part of a person's bills, rather than providing the income they need to meet all household expenses.

"They are also restrictive, in that they run for a maximum of two years in the event of sickness, while a person may be forced to stop work for longer than that. Moreover, the small print often has so many exclusions that it is hard to compare between them - while often you are tied to that lender's policy."

Philippa Gee, a financial planner and managing director of Gee & Co, in Shrewsbury, argues: "A more sensible approach would be to take out permanent health insurance, which covers you in the event of illness up to retirement. Here, we are talking about income replacement rather than paying off debt."

For someone aged 40, aiming to replace an income of pounds 45,000 with net monthly payments of pounds 2,157, potentially up to the age of 60, she recommends a Swiss Life policy, which kicks in after 90 days, and whose premiums and benefits escalate in line with inflation, at a cost of pounds 59.17 a month. "They are not the cheapest," says Ms Gee, who works only on a fee-paying basis, "but we do have some concerns about the claims history of others."