What is Income Protection?
The purpose of Income Protection Cover is to provide a regular income if you are unable to work for a certain period due to illness or injury and you suffer a loss of earnings as a result. It can also be called ‘permanent health insurance’ (PHI) – but is not the same thing as private health insurance.
To obtain income protection insurance cover you generally must be in full-time paid work or be self-employed. You must be totally unable to perform the essential duties of your normal occupation and not be engaging in any other occupation.
You should consider income protection if you:
- Are self-employed or employed and have no other source of income if you become unable to work due to illness or disability
- Have dependants who rely on your income
- Have little or no sick pay from your employer
- Have no ill-health pension protection
- Don’t have sufficient benefits to replace your lost income and/or cover your expenses
The benefits of Income Protection include:
- Income protection pays up to 75% of your normal income, allowing you to continue to take care of your family
- Income protection will allow you to continue to pay towards your outgoings such as household bills, loans, holidays, school fees and unexpected costs
- Income protection has a guaranteed level premium option which means the cost will stay the same and never go up, even if you make a claim so you can budget for your premium
- Payments continue either until you are well enough to return to work or your policy ends
- There is no restriction on what you use the Income Protection benefit for
- If cost is an issue, you don’t have to cover your full normal income, even a little cover is better than none
- Income protection premiums qualify for tax relief
- If you are in hospital for more than seven days income protection will pay a daily replacement income during your deferred period
- Cover can be maintained if you are relocated in your job to anywhere within the EU
- Your income protection cover can be increased every 3 years, by up to 20% of your original cover level, without further medical information
This cover, therefore, allows you to continue to meet, for example, lifestyle expenses, college fees, medical costs, holiday and even pension contributions. Where you have a one-income household, this cover can often be extremely important to the long-term financial security of a family.
You can cover up to a maximum of 75% of salary less the state disability benefit where you are entitled to it. For underwriting purposes, occupations fall within certain classes depending on their perceived ‘riskiness’. When setting up a plan you must also choose a ‘deferred period’, this is the number of weeks which must lapse before a claim payment is made. Policies with a longer deferred period will have a lower cost and for those in employment with a sick-pay arrangement, this can help reduce cost.
Income Protection can help protect your lifestyle and limit the financial consequences of being diagnosed with a serious illness or injury that prevents you from working.
Ireland has the third highest cancer rates in the world. 1 in 2 people in Ireland will develop cancer during their lifetime and it is predicted that Ireland could potentially see a doubling in the incidence of cancer by 2045 (NCRI 2019)
Each year, approximately 10,000 Irish people have a stroke and an estimated 30,000 people are living in the community with disabilities as a result of a stroke. This makes stroke the biggest cause of acquired disability in Ireland ( Irish Heart Foundation 2021).
Although medical advances mean people are more likely to survive serious illnesses such as cancer and stroke, it does result in more people likely to have to take prolonged periods off work for treatment and recovery. This could have a huge impact on their ability to earn a wage and continue to pay for bills.
- Choose the sum you want to receive if you make a claim – you can choose from €5,200 to €262,500 a year
- Select the length of your policy – cover can end anytime between the age of 50 – 70 years
- Pick your deferred period – that’s the time you wait before your policy pays out your benefit. It can be 4, 8, 12, 26 or 52 weeks
- Decide if the money being paid out should keep up with inflation
Things to consider before taking out income protection
Firstly, check if you are entitled to the following benefits:
- Social welfare disability benefit – this is a weekly payment offered by the government. This is not available if you are self-employed
- Sick pay – This is where your employer pays all or part of your wages for a period
- Ill-health retirement pension. This lets you take early retirement with a pension if you become permanently unable to do your job. If you are a member of an employer pension scheme, you may be entitled to get this type of pension
Costs will mainly depend on:
- The level of cover you chose (usually linked to a percentage of your income)
- The deferred period you choose
- Term of the policy
- Your age
- Your health
- Family medical history
- Your occupation
- Lifestyle factors
If you have personal insurance protection you will receive the amount that you requested when you set up your policy minus any other income or benefits.
As an example, to help illustrate-
1. Michael, an employee, earns €40,000 a year. He has income protection insurance for €30,000 a year. His policy will pay up to a maximum of 75% of the amount he was earning before he was unfit to work, minus any other income or benefits he receives.
Michael puts in a claim to his insurance company and starts to receive his payment after 12 weeks, which is the deferred period he chose when taking out the policy. Michael must tell his insurance company about the other benefits he receives while he is out of work which include:
- €750 sick pay per month from his employer
- social welfare disability benefit of €750 per month
What benefit will Michael get?
|75% of annual salary of €40,000 = €30,000||€2,500 per month|
|Less sick pay||– €750|
|Less social welfare||– €750|
|Maximum benefit per month||€1,000|
Therefore, although Michael was insured for a benefit of up to €2,500 per month, he can only claim €1,000 per month because of the other benefits he gets.
2. If on the other hand Michael was self-employed he will would not receive social welfare disability benefit or sick pay from his employer. The maximum benefit he could claim therefore would be the same as his insured benefit of €2,500 per month.
It is important therefore to consider if you are entitled to any other benefits before you take out income protection to ensure you are not taking out too much cover versus what you actually need.
- Personal Income Protection and
- Executive Income Protection
Personal Income Protection
Personal Income protection insurance pays out a regular cash payment that replaces part of your lost income if you can’t work due to a medium to long-term illness or disability. The policy holder pays the premium and receives the benefits
Executive Income Protection
Executive Income Protection is for employers who wish to provide income security for their key employees or Directors. With an Executive Income Protection, the company rather than the individual pays the premium and receives the benefits to pass on to the insured employee through payroll.
The premiums qualify as allowable business expenses that the company can offset against corporation tax.
These may include:
- rehabilitation assistance
- relapse benefit
- partial benefit
- home-visits with independent qualified nurses or professionals
- return to work support
- career change guidance
What is the Cover Level?
You can cover yourself for a maximum of 75% of your normal basis annual income, less the state disability benefit where applicable. If cost is an issue, you don’t have to cover your full normal income, even a little cover is better than none
What is the Deferred Period?
This is the waiting period prior to which claim payment commences. It can be between 8 and 52 weeks.
What is the Policy Ceasing Age?
This is normally your expected retirement age up to a maximum of age 70, depending on your policy. If a claim occurs and you have not recovered from your illness or disability the policy benefit pay-out will continue to this age.
What is Occupational Risk and Classes of Jobs?
Your job affects your premium because some jobs are riskier than others. Insurance companies put jobs into classes and charge different premiums for each class. People with ‘Class 1’ jobs are considered the lowest risks and would pay the lowest premium compared with jobs that have a degree of occupational risk, e.g. working with hazardous materials, at certain heights, or working in confined spaces.
|Class 1||Class 2||Class 3||Class 4||Class 5|
laboratory technician caterer
Source CCPC Website https://www.ccpc.ie/consumers/money/insurance/income-protection-insurance/
Your benefit payment stops as soon as one of the following happens:
- You return to work
- You reach any age between 55 and 70 depending on the policy. This is called the ‘benefit cessation age’. This should be no later than your planned retirement date
- The insurer’s medical officer, who may check your medical condition from time to time, decides that you are fit to return to work
Income Protection will not be paid if you become unemployed and it does not cover redundancy.
Payments on your income protection plan are eligible for income tax relief at your marginal rate of tax.
Because there is a lot to consider when choosing an income protection policy, we recommend you speak to our advisors at Quoteleader who will be able to support you in choosing the correct type of income protection.
Here are some of the main things to think about and what we will talk through with you:
- The deferred period: This will impact the cost of the policy
- The amount of cover: Ensure you get as much cover as you need and can afford
- Cover benefits: Work out what benefits you need
- Length of cover: Check the maximum term age if you’re planning on working beyond 65. You should also think about when your bills will reduce e.g. your mortgage
- Other entitlements: Will you be entitled to sick pay from your work or social welfare? If so this may reduce the amount of cover required
These are the essentials, but as I always say, you should not go ahead with any policy until speaking with an advisor to ensure it fits your requirements exactly. Income Protection, in particular, is a complex area so please feel free to give us a call on 01 539 44 50 and speak to one of our expert advisors.