Income Protection

Soften the blow – Income Protection: Can you afford not to have it?

We insure our cars, house, holidays and even our pets yet a large proportion of the population do not insure the very thing that funds our lifestyle, our income.

We all fund our lifestyle by spending our hard-earned income.  This income is an asset and is used to pay mortgages, utility bills, savings, retirement plans, education costs, insurance premiums and fund our lifestyles to name a few.  So, what happens if we get sick or have an accident and this income stops?  This is where Income protection insurance comes in.

Income Protection also known as Permanent Health Insurance (PHI) provides you with a replacement income if you are unable to work due to an accident, injury, or illness.  It can replace up to 75% of your usual income less any social welfare payments when you are off work due to an illness, injury, or accident.  Income protection is a ‘must have’ product for a large proportion of the working population, particularly those who are self-employed, and should not be deemed a luxury purchase.  It is particularly important for anyone who is self-employed or a Company Director paying class S PRSI as they are not entitled to the State Illness Benefit.  PAYE workers receive a State Illness Benefit of just €203 per week.

How does it work?

Just like any other insurance policy, you pay a monthly premium.  This premium is determined by your age, term of the cover, occupation, general health, and your chosen deferred period.  If you are unable to work, your chosen insurance company then provides you with a replacement income until you return to work, or until your chosen retirement date, if you are not fit to return to work before then.

Unlike many other insurance products, if you make a claim, your policy will continue at no extra cost to you, meaning if you have to claim again in the future, your policy will still pay out.

Factors to consider before taking out an Income Protection policy?

• How much Income Protection do I need?

That is entirely up to you and how much you can afford.  The maximum level of cover that you can insure yourself for is 75% of your earned income, this must include any State Illness Benefit you may be entitled to. You can insure yourself for less than 75% if you wish, if you feel you could maintain your lifestyle on a lower amount, which would keep the cost of your cover down.

• Tax relief on my premiums

It is the only type of Insurance on which the Government will give you full tax relief at your marginal rate, this tells you just how important this type of cover is.  In effect, you can now use your tax bill to start paying for some of your Insurance costs.

Take the following example of a 40-year-old male non-smoker, solicitor, who earns €60,000 per annum.   He has chosen to protect 50% of his salary (€30,000 p.a.) until his retirement at 65.  He selects a 6-month deferred period and chooses guaranteed, increasing premiums.  His gross premium is €80.00 per month yet it only costs him €48 per month after tax relief at 40%.

• What is a Deferred Period?

This is an initial waiting time at the start of your claim also referred to as the waiting period or the excess period.  It relates to the length of time between when you were last at work and when your income protection policy starts to pay out.  You can choose the length of the deferred period.  You can have a 4, 8, 13, 26- or 52-week waiting period if you are paying your premium personally.  If your company or employer is paying the premiums, your deferred period will vary depending on what arrangement they have with their insurance provider and depending on what the company’s sick pay policy is.  Simply put, the shorter the deferred period, the higher the premium will be.  Typically, people choose a deferred period that fits in with their employment or savings.  For example, if your employer will pay your salary for six months if you are out sick, you could choose a policy that will start to pay you after six months.

There are a range of plans available from numerous insurance companies and it is important to get the best option for you allowing you to create a plan to fit your lifestyle. You must keep up your payments to ensure cover.  As your needs change your income protection plan can be adjusted to suit your circumstances.

Income protection should not be confused with specified illness cover, which pays a once-off lump sum if you have a specified serious illness.  Specified illness cover will be covered in a future issue.

In summary, Income protection should be considered a necessity rather than a luxury for a large proportion of the working population.  Most of us have some form of life Insurance in place, yet statistically we are far more likely to be out of work sick for a long period than to die before retirement.  Income protection will help take care of your financial needs while you are focusing on recovery at a time when money worries should be the last thing on your mind. 

All information and views contained within this article is for informational purposes only and the views expressed do not constitute financial advice.  U Consulting makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use.  Please consult a professional financial advisor before making any financial decision.

Transform your financial life

Author – Brian Flanagan