Income Protection or Permanent Health Insurance (PHI) will pay you an income if you are unable to work for an extended period of time because of illness, accident or disability. Different companies use different terms to describe PHI, and although the terms may be different, they all mean much the same thing - you are guaranteed some sort of positive cashflow protection.

Actuaries have estimated that people of an average working age have a one in five chance of being unable to work for at least three months because of illness. If you are an employee then your employer must pay you £ 57.70 a week Statutory Sick Pay.

If you are self-employed, you are looking at the possibility of receiving only £48.80 a week in the form of State Incapacity Benefit. For a father of two children, earning £30,000 a year, falling back on to long term incapacity benefit could reduce his before-tax income by more than 75% to just £6,833 a year.

PHI may be costly but Which? Magazine recommends that it is the most important health insurance to consider. "Many people opt instead for a simpler critical illness policy (see CII) without understanding that its coverage is much more restricted. For every three income protection insurance claims that result in a payout, only one critical illness insurance would trigger a payout."

PHI is taxable if it is provided through a company scheme, but it is currently tax-free if you pay for it through an individual policy.

You can choose a "waiting period" of at least 4 weeks up to 2 years from the onset of the unfortunate event until the policy starts to pay out. The longer the waiting period the lower the costs of the premiums. If you have an existing health problem you may have to pay more unless the ailment is excluded.

Before you consider taking out any private insurance, think about what you have in place already to help you if you had to stop work as a result of illness or a long term disability. If you are an employee, your employer may run a decent sick-pay scheme, ask if it will pay you a reasonable income if you are forced through ill health to stop work or if you have an accident. If you are self-employed, the answer ought to be a private insurance scheme and you should have done something about it already.