Think about this for a second.
If you had a money making machine in your house, would you insure it?
Of course, you would.
You, dear reader, are also a money-making machine.
You will generate hundreds of thousands, if not millions of euros in your working life.
And that’s why you need to insure yourself with income protection.
If you break down and are out of work for a long period, the money-making machine will stop.
What would happen then?
Who doesn’t like a good duvet day?
It’s appealing: stay snuggled in bed, wrapped around your blankie – especially if you have young kids who think 5 am is a good time to stand on mam and dad’s bed to shout and roar. (Kids. Aren’t they great?)
Those fake sick days can add up – and that’s not to mention actual illnesses. There’s only so much flat 7up and hoping for the best will actually cure. 
So what’s the story when you go far beyond man-flu, sickies, or a stomach bug brought into the house by your loveable-but-extremely-sneezy kids?
What happens if you’re hit by a car or you get an illness that leaves you bed-bound for months?
Income Protection might seem pretty far down the list of required insurances, but if you’re out of work for more than a few weeks, you’ll be so very glad you have it.
So what do you need to know about Income Protection – and should you actually buy it?
If you can’t explain a concept to a five-year-old, the theory goes that you don’t fully understand it.
Now, I have no idea why a five-year-old would want to know about Income Protection, but to confirm the theory let’s break it down:
If you’re out of work for more than four weeks due to any illness, injury or disability, you’ll receive a payment of up to 75 per cent of your income until you can go back to work.
Will a five-year-old understand that?
Absolutely not.
Explaining it to a five-year-old might go as follows: Mum is sick and can’t go to work, so the people in suits in big glass buildings are going to give her money to buy toys and food.
Moral of the story: if your five-year-old is asking about Income Protection, give him a suitcase and a little hat and send him on his way, because he’s secretly 40 and there was a terrible mistake at the hospital.
Everything.
Unlike serious illness cover, income protection covers you for ANY illness, injury or disability that stops you from doing your job.
You’re covered for absence from work due to a serious illness like cancer. But you’re also covered for a simple accident that keeps you out of work. Let’s say you slip and hurt your back – you’re covered.
You’re covered if you’re out of work due to any illness, injury or disability.
In a previous article, I looked at the alternatives to income protection.
As you can tell, I don’t think any of the alternatives provide peace of mind should you be unable to work long-term.
And if you’re thinking of relying on sick pay from work, this blog on how much sick pay you are entitled to in Ireland will be an eye-opener.
A robust Income protection plan is the only way to properly safeguard your income.
By the way, income protection = salary protection = income continuance insurance = disability insurance.
You can insure up to 75 per cent of your income.
This takes a little explaining so listen up down the back.
Let’s say you’re an employee earning €80,000 and you’re entitled to state illness benefit of €220 per week (€11,440 per year).
The maximum you can receive in total from the state, your employer, and your insurance company is 75 per cent of your income.
That breaks down into €11,440 illness benefit from the state with a balance of €48,560 from your insurer.
€11,440 + €48,560 = €60000 (75% of €45,000).
Now, there are tax implications. Any pay-out is classed as income so you’re taxed at your marginal rate at the time of the claim.
It could so happen that you get the higher rate of tax relief on the premium but you’ll only pay the lower tax rate on your claim
And it’s still an awful lot more appealing than trying to survive on the weekly €220 the state pays.
No, income protection covers your inability to do your job due to illness, accident or disability.
The insurers class occupation according to the likelihood of a claim.
The higher the risk of a claim, the higher the occupation class.
If your occupation is Class 1 (e.g a pharmacist) you will pay less than someone who is a Class 2.
If your occupation is Class 3 or 4, you may want to look at Wage Protector which is a more affordable type of income protection.
You must have some incentive to return to work.
If you’re lucky enough to be a company director, you can take out an additional 33% to cover your pension contributions.
Let’s say your taxable income is €100,000.
You can insure up to 75% of this as income replacement = €75,000 and also 33% to cover your pension contributions = €33,000.
Depending on the insurer, it will pay €108,000 gross to your company if you make a claim.
Why?
I think I know…
Because you think it’s a scam and the insurers never payout?
Do you think you can’t afford it?
Or are you afraid you don’t qualify for some reason?
These are all valid points (I asked the same questions before I took out my policy)
So let’s go through them one by one.
Yes they do and they now publish their claims figures – see a previous article I wrote on life insurance claims.
The insurers paid 95% of income protection claims in 2017.
Maybe you can’t afford to insure the full 75% of your income…. with a 4-week waiting period…. that pays out until you’re 70.
But if you tweak the figures, you’ll figure an amount of salary protection cover that suits your budget.
Insuring 50% of your income with a 26-week waiting period until age 60 beats leaving yourself exposed by having no income protection at all.
Have a read of this article to find out ways you can reduce your premiums to a more affordable level
More than likely yes.
The main reasons people don’t qualify are:
If you’re worried about a pre-existing condition, please complete this questionnaire and I’ll discuss it with my underwriters on a no-name basis.
So they’re the reasons you’re hesitating.
Here’s why you shouldn’t:
What would happen if you were unable to work long-term due to illness?
Your income would stop.
How would you pay your mortgage?
The bank would have some sympathy, but that wouldn’t stop them from trying to evict you.
Imagine if you had a magic wand, you could wave to stop the bank from repossessing your home.
Your income protection policy is that magic wand.
It’s your promise to the bank that you’ll be able to pay your mortgage once your income protection payouts kick in.
For me, it’s the most important insurance you can buy.
Your income is your biggest asset.
Truthfully, tell me how effed would you be if your income stopped for one year? How about three years?
Yes.
It’s easier to claim because it covers ANY illness, injury or disability that prevents you from doing YOUR job.
To claim serious illness coverage, you have to contract a specific illness to claim.
See more on income protection v serious illness cover
And once you’re out of work on a claim, your policy will pay you until you get back to work or until you reach retirement.
Income protection does not cover
Redundancy – if you leave a job or get made redundant.
Maternity Leave – having a baby is not a medical condition, so you’re not covered. However, you can make a claim if you can’t get back to work due to a pregnancy-related complication.
Illnesses or accidents that stop you from working temporarily but you’re back at work before serving your deferred period, e.g you break a leg and are out of work for four months, but your deferred period is six months.
If you’re not working at the time of a claim – if you fall ill between jobs, you’re not covered. Make sure to update your policy if you are between jobs.
Working abroad – if you move from Ireland, your policy is no longer valid
Yes, if your employer is evil enough to fire you while you are out on an income protection claim, at least your insurer has your back:
What happens to income protection if you’re dismissed?
Exclusions vary between insurers so please be careful when it comes to choosing which provider you go with.
The following exclusions are common to all providers:
A common theme I’m seeing from clients is the confusion between serious illness cover and income protection.
They’re 2 totally different products – it looks like we, as an industry, have made a balls of differentiating them.
Serious illness cover – pays out a lump sum should you contract a specific illness as defined on your policy.
e.g certain types of cancer, stroke, heart attack – so must be seriously ill for a successful claim.
Income protection – pays you an income for as long as you cannot work due to ANY illness or injury
e.g backache, stress – once the illness prevents you from doing your job, your policy pays out.
Serious illness cover exists to clear debt/pay medical bills.
Income protection can provide you with an income for the rest of your life to continue living as you do now.
You pick the limit or time frame.
You can cover your income for 10, 20, 27, 32 (however many years you like) up to a maximum age of 70.
So if you buy an income protection policy to age 65, your policy will pay you a replacement income until you hit 65.
The income you receive doesn’t scale back.
If you insure yourself for €5000 per month, you’ll receive a taxable income of €5,000 per month until your policy ends.
In fact, you can add “claim escalation” to your policy – this means your payout increases by 3% every year you are out on a claim.
This is important.
It pays out if you’re unable to do your job not if you lose it.
You can get redundancy coverage as part of mortgage payment protection but we don’t offer that product. It’s gotten bad press for a reason.
You can have as many income protection policies as you like, but you must stay within the 75% of income rule.
So let’s say you earn €100,000, and you have a policy for €50,000 (50% of your income) through your employer.
You can take out an additional policy for the remaining 25% of your income i.e €25,000
Yes, if you are entitled to a social welfare payment, you will receive it in addition to your income protection payment.
If I were to become ill with, say, stomach cancer. I recovered and returned to work after two years. Then sometime later, I got prostate cancer, or I had a bad car accident and was badly broken up (or some other thing). Does the policy payout again for another “thing” happening to me?
Yes, income protection can payout multiple times.
If you return to work and relapse with the same illness, you don’t have to serve the waiting/deferred period again.
You have to serve the deferred/waiting period if it’s a new condition.
Mortgage protection – leaves a lump sum to your bank to clear your mortgage on death.
Life insurance – leaves a lump sum of money to your loved ones to replace your income should you leave them before your time.
Income protection – pays out while you are still alive. It provides a replacement income should you be unable to do your job due to illness or injury.
From a selfish point of view, income protection is the only one you will benefit from.
Life insurance and mortgage protection are for the ones you leave behind.
No, not at all; in fact, income protection is essential if you’re self-employed because you don’t qualify for any state benefit.
But didn’t the government change all this a few years back?
I’m afraid not, the only thing that changed was access to the Invalidity Pension and you have to be permanently incapable of work to qualify.
It was a sop to the self-employed, but if you dig deep, it’s pretty worthless.
If you’re self-employed and you don’t have income protection, you’re a lunatic.
Read more here about income protection for the self-employed
Surprisingly less than you think.
It depends on your
Read this piece on the factors that influence the cost of income protection.
If you choose a policy with a fixed premium, your premium will not change as you age.
However, if you choose a reviewable premium policy, your premium could increase every five years.
Here I compare reviewable and guaranteed premium income protection.
Ask yourself:
what if the lower paid partner couldn’t work long-term, would you be in trouble financially?
If the answer is yes, then you both need income protection.
But if the answer is no and affordability is an issue, then insure the higher earner only.
Sadly I have seen cases where the higher earner had to give up work to care for the lower earner, so it was a double whammy; both were hit with a reduced income.
The lower earner’s income protection policy was a lifesaver; without it they would have had to rely on the carer’s allowance and illness benefit only.
This is an extreme case, but it happens.
With income protection, as with all insurance, you prepare for the worst but hope for the best.
Great question – that’s where I come in.
I know how income protection works in Ireland.
And I know the ins and out of all five income protection providers in Ireland so I can recommend the one that suits you best.
Each insurer has its own little quirks like these:
Not now, but once you’re back at work, you can apply.
You can keep your income protection while on maternity leave, but it doesn’t pay out for maternity as pregnancy isn’t a “health issue”.
However, should an event during pregnancy stop you from returning to work (e.g childbirth complication or Post-Natal Depression), you can make a claim.
You can claim, but the insurer will reduce your payment by any income you receive from your employer, be it in the form of income or shared profits.
Before you take out income protection, make sure you will have an income shortfall to protect if you can’t work.
This depends on the insurer.
Some will take a percentage of overtime/commission/bonus into account.
But if it’s a guaranteed bonus or your Statement of Earning can show it has been consistent over a number of years, some insurers will consider it all.
If your cover is below the limits above, you can get cover based on an application form alone.
Correct, income protection insures you against the inability to work due to illness/injury/disability, not redundancy/lack of work.
You can have as many policies as you like as long as the total cover does not exceed 75% of your income.
So if you have a personal policy or a policy through your employer for 75% then that’s your limit, you can’t have a second policy.
However, if your other policy insures only 50% of your income, you can take a second policy for the 25% shortfall.
If it’s unearned income (e.g rental) then the insurer isn’t too bothered.
However, if it’s earned income that continues while you are out on claim, then the insurer may reduce your payout by that continuing income.
e.g someone who works in an office but also has farming income that continues while they are claiming income protection.
You can increase your income protection in three ways:
To make sure you receive the inflated payout, your income will have to increase over time too.
An example will clear things up:
Let’s say you earn €60,000 and you’re a PAYE employee who is eligible for an illness benefit of €10,556 per year.
You insure the maximum amount possible:
(€60,000 x 75% = €10,556) = €34,444 and add indexation which will increase your cover by 3% each year.
In 5 years, your cover has risen to €40,000.
You fall ill and make a claim.
The insurer will request proof of your income over the preceding 12 months when you make a claim.
If your income has remained at €60,000 then the maximum the insurer will payout is €34,444 (€60,000 x 75% – €10,556)
Your income would have had to risen to €67,408 to get the full €40,000. (€67,408 x 75% – €10,556) = €40,000
In other words, if you are adding inflation protection, you must be confident that your income will increase in the future.
Otherwise, you are in danger of over-insuring yourself.
The rate of inflation isn’t identical at all of the providers:
Your premium increases pro-rata. You can do this up to 5 times over the life of your policy, thus doubling your original cover.
You can add “claim escalation/escalation in claim” to your policy from the outset.
This will increase your payout by 3% every year you are out on a claim, but, as with the indexation option, above, your income must be able to support the increased payout
It should match the ceasing age on your contract of employment.
If this isn’t on your contract, most people choose 68 as that’s when you’ll be eligible for the state pension under current rules.
But the way things are going, soon you’ll have to wait until 70 to get the pension!
Yes, unless you added claim escalation when you took out your policy. If you did, your payout will increase by 3% every year you are unable to do your job.
Claim escalation will increase your initial premium.
As you can see there is an awful lot to income protection so Please, please, PLEASE take advice before you sign up/
How to choose an income protection broker.
If you don’t have an advisor, I’d love to help.
Complete our short income protection questionnaire below, and I’ll be right back with a no-obligation recommendation and some quotes.
Or if you’d like a quick chinwag first, please schedule a call here
Nick McGowan
lion.ie | making life insurance easier
As Ireland's leading life insurance broker, we specialise in comparing the rates and policies from the top five Irish life insurance providers and offering the very best value quotes to suit the individual needs of our clients. Our expertise lies in finding a suitable insurance plan for those with specific needs, be it a particular illness, occupation or claim history, we've got you covered in every sense!
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