Income Protection: ensuring your salary continues when you can no longer work.
Protecting your earnings.
Below I discuss why I think Income Protection is the most valuable protection policy offered in Ireland and should be carried by every person who relies on their income to meet monthly outgoings.
Ideally, income protection should be taken out while young & healthy to avail of low rates and avoid any exclusions due to pre-existing conditions that come with age.
Note: Many employers offer income protection as benefit to their staff, be sure to know the details of your entitlement. Some employer provided plans are short term and offer 6 months to 2 years of pay, after which they cease. Others offer long term cover (to retirement age) but may have a reduced benefit of 50% of salary. In both cases, you could purchase a small personal income protection policy to fill the gaps.
Broad based cover:
Income Protection is a policy you can take out to insure your salary against disability due to ANY illness or injury.
Income Protection differs from serious/critical illness as you need not be diagnosed with a specific condition to make a claim. The most frequent claims are made for mental health breaks and back injury (orthopaedic). Income protection is often referred to as PHI or disability cover.
On Going Payments:
The benefit is payable each month and not in a once off lump sum. You choose the amount you would like to receive per month (up to 75% of your regular income) and for how long.
Most people choose to cover their income until retirement, the current maximum age in the market is 70.
You also choose how soon your disability payment begins, from 4-52 weeks, this is referred to as the deferral period. The sooner your benefit begins, the higher the rate. Most people choose a deferral period of either 13 weeks or 26 weeks.
Policies are underwritten similar to life or serious illness cover and rates are affected by the following: your health, your age, smoker status, occupation, monthly benefit chosen, policy term chosen and deferral period chosen.
Income protection policies have high claim frequency, making their premiums higher than standard term life insurance. You may opt to only insure a portion of your income to suit your budget, you might consider insuring your mortgage/rent payment or your most basic monthly outgoings.
Case Study: At age 30, you purchase a policy with a monthly benefit of €2,000, a deferral period of 13 weeks, to be paid to age 65. At age 36 you have chronic back pain and you can no longer continue working. 13 weeks after a medical professional states you are not able to work, your policy begins paying you €2,000 per month until you recover or age 65 -if you did not recover, the policy would pay out €690,000 over the policy term.
Tax Relief:
Revenue realise the importance of effecting income protection and similar to health insurance, they allow you to avail of tax relief (at your marginal rate) on income protection premiums paid.
If you’re a PAYE worker, simply notify revenue online.
At the higher tax rate, a premium of €50 per month, reduces to just €30 per month after tax relief.
FLEXIBILITY:
There are a number of features available (depending upon the provider) to suit your working life through the years.
You can change roles and even switch industries entirely after effecting a policy and keep your benefit -highly beneficial if you have moved to an occupation with a higher risk rating.
In the event of a claim, income protection policies allow for a reduced working hours to suit your needs. If you are able to return to work in a reduced capacity, a proportionate benefit remains payable.
If you are effecting a policy early in your career, you can add indexation, allowing your benefit to increase each year by a percentage (typically 3%) keeping your policy in line with pay increases over time.
You can alter the plan from a personal income protection policy to an “executive income protection policy” where your employer takes over premium payments with no benefit in kind payable.
If you become unemployed after effecting a policy and become disabled, a reduced payment remains in place (typically €15,000 p.a.).
Queries?
I’m conscious income protection is complex, please feel free to contact me to discuss the above in further detail.
I’m happy to look at any cover you may have or answer general queries.
Rachel O’ Shea, Protection Manager, 021 452 1328 roshea@olearylife.ie