In a previous blog post, 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.
A robust Income protection plan is the only way you can properly safeguard your income.
By the way, income protection = salary protection = income continuance insurance = disability insurance.
I’ve got to thank readers of my blog for their input to this post as they provided the question so excuse the language!
You earn €41,000.
You take out income protection for the maximum amount which happens to be €20,194.
the insurer will pay you the LOWEST of
a) the amount you are insured for on your policy document (€20,194)
b) an amount equal to 75% of your income in the 12 months preceding your claim, less illness benefit (or other income)
In plain English, if you make a claim, and you are paying for income protection of €20,194, the insurer will pay the LOWEST of
a) the amount on your policy i.e €20,194 in your case
b) 75% of your income at the time of the claim taking away any continuing income
So let’s look at the three possible scenarios:
1) You make a claim when your income in the previous 12 months was stable at €41,000
The insurer will work out a) and b) and payout the lowest.
Both figures will be identical so they pay out the full €20,194
2) You make a claim when your income in the previous 12 months increased to €60,000
a) will be €20.194
b) will be (€60,000 x 75%) less €10,556 = €34,444
They will pay out the lowest i.e €20,194
3) You make a claim when your income in the previous 12 months fell to €30,000
a) will be €20.194,
b) will be (€30,000 x 75%) less €10,556 = €11,944
They will pay out the lowest i.e €11,194
I know I’ve thrown a lot of figures at you there.
If you have questions, please give me a call on 05793 20836 and I’ll answer them for you.
You must have some incentive to return to work.
We often get asked this, as there’s a general perception among Irish folks that there are loads of way for the insurers to wriggle out of paying claims.
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 12 months, how about 3 years?
And the terms and conditions are very straightforward unlike serious illness cover, where you have to contract a specific, defined illness in order to claim.
Income protection will pay out for ANY illness, injury or disability that prevents you from doing YOUR job.
So once you’re unable to work due to an identifiable illness, your policy will pay you until you get back to work or until you reach retirement.
Take a minute to imagine your life if your income stopped before you decide whether income protection is really worth having.
Exclusions vary between insurer 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 muse 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 your job.
You can get redundancy cover 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.
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.
It depends on your
Read this article I wrote on the factors that influence the cost of income protection.
If you choose a policy with a fixed premium then your premium will not change as you get older.
However if you choose a reviewable premium policy, your premium could increase every 5 years.
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 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 5 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 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 employment, 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 guaranteed bonus, or your Statement of Earning can show it has been consistent over a number of years, some insurers will take it all into account.
If you cover is below the limits above, you can get cover based on an application form alone.
Correct, income protection insures you against inability to work due to illness/injury/disability, not redundancy / lack of work.
Yes, here is Trudy’s story:
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.
You can increase your income protection in three ways:
1) Add inflation protection. Your cover will go up by 3% every year and your premium by 3.5%.
2) Every 3 years, you can increase cover by up to 20% of your initial cover without answering health questions. Your premium increases pro-rata. You can do this up to 5 times over the life of your policy thus doubling your original cover.
3) Apply for an increase whenever your salary goes up but if you do so you must answer health questions on the additional amount.
Yes, unless you add add claim escalation when you take out your policy. If you do so, your payout will increase by 3% every year you are off work. Claim escalation will increase your initial premium.
Please, please, PLEASE don’t just go for the cheapest quote.
Get some independent advice.
If you don’t have an advisor, I’d love to help.
Simply complete the quick outline form below and I’ll be in touch.
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