Special Report on Private Health: Cinderella hopes to find a permanent niche in the market: Alison Eadie reports on the blossoming range of alternatives available to those aiming to reduce financial risk when illness strikes

GOVERNMENT efforts to force people to provide for their own sickness, disability, pension and other needs instead of relying on the state will encourage people to buy policies cushioning them from the financial effects of illness. That at least is the hope of insurers and others providing permanent health insurance (PHI), critical illness cover and hospital cash plans.

Permanent health insurance has been described as the Cinderella of the healthcare market. It provides a regular income until retirement if the subscriber is permanently disabled and unable to work and is bought most often by the self-employed. The market potential is seen as the 25 million working population, but the take-up is only just over 3 million people.

Big insurers like Allied Dunbar, Sun Alliance, Friends Provident and Norwich Union dominate the market. Swiss Life has just started offering personal PHI in the belief that government policy will be the catalyst for growth.

From April the statutory sick pay rebate from the state was limited to companies paying under pounds 20,000 a year in National Insurance contributions. One-third of UK companies ceased to be eligible. The greater burden on employers could make them less willing to keep sick employees on the payroll.

From April next year the new incapacity benefit (formed from the merged sickness and invalidity benefits) will be taxed in part. Stricter criteria - notably the switch from own to any occupation basis of assessment - will ensure fewer people qualify.

Swiss Life says a 40-year-old self-employed company director with two children on a salary of pounds 40,000 (net pounds 28,363) would suffer a 69 per cent drop in income if disabled and forced to rely on state benefits of pounds 8,824 a year.

To protect his or her style of life, the director could take out the maximum Swiss Life PHI policy which would guarantee 75 per cent of gross income less single person's state benefit. Monthly payments of pounds 86.49 would provide an income of pounds 27,000 a year until the age of 60, assuming the payout was deferred for eight weeks. A longer deferment period would reduce monthly premiums. The 60 per cent option would provide an income of pounds 21,000 for a monthly premium of pounds 61.14.

Swiss Life is guaranteeing rates for the life of the policy. Sun Alliance and Friends Provident is another big insurer guaranteeing rates. Others have moved towards variable premiums. Allied Dunbar reviews rates every five years, but anticipates charging the same through the life of the product.

PHI providers have changed occupational loadings. Loadings have always been high for those in dangerous occupations. One shift is that teachers have been regrouped due to the high numbers being pensioned off with ill health. Some insurers have moved them from Category A to Category C risk - the same as heavy manual workers. Allied Dunbar has kept teachers in Category A, but changed the definition of disability so that teachers no longer qualify for PHI payouts if they are fit for other work.

Hospital cash plans, often advertised as an alternative to private medicine, do something different. They pay out when the subscriber or members of his/her family go into hospital. They are of particular relevance to the self-employed or those whose earnings would be badly hit by loss of overtime. They provide income so that the mortgage and bills can be paid when the breadwinner is in hospital.

Hospital Savings Association (HSA), the market leader with 2.5 million members, says there has been a significant pick-up in interest recently. Shaun Astley, director for member services at Bupa, said Bupa's hospital cash plans were increasing in popularity, particularly when bought in conjunction with budget medical insurance.

HSA has four options. For pounds 1.20 a week, the HSA subscriber and/or partner receive pounds 63 a week as hospital in-patients and pounds 25 towards both dental and optical costs. The most expensive option costs pounds 7.20 a week and pays pounds 378 a week for a hospital stay and pounds 150 towards dental and optical costs.

Critical illness or dread disease cover is a new but rapidly expanding product offered by some 60 companies. It pays out if the subscriber contracts specific diseases such as heart disease, kidney failure or cancer, even if the subscriber recovers and returns to work. The range of diseases covered is expanding. Sun Life cover includes loss of speech and HIV contracted through a blood transfusion or work. Allied Dunbar's 'Lifestyle Plus' covers 17 core diseases and four degenerative diseases including Alzheimers.

Policies can be stand-alone or linked to life insurance. If the subscriber dies suddenly payout is certain with a linked policy, but with a stand-alone policy the subscriber usually has to survive for a minimum period - often 28 days - before being paid.

Under an Allied Dunbar policy a male non-smoker aged 40 would pay pounds 54.05 a month for pounds 50,000 stand-alone critical illness cover against the core diseases. For an additional pounds 15.40 a month he could add life cover.

New products are on the way. Private Medical Intermediaries, the independent healthcare consultant, is looking for an underwriter for a product designed by Munich Re, the big German insurer. Medical insurance will be different from critical illness cover in that it will offer specified cash sums for each operation, medical condition and illness.

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