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How Income Protection Works in Ireland in 2021

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does your employer pay you if you're sick

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!

Can you simplify how income protection works?

You earn €41,000.

You take out income protection for the maximum amount which happens to be €20,194.

If you

  • are unable to work
  • for longer than the deferred period on your policy (4,8,13,26 or 52 weeks)
  • due to any illness, injury or disability (pre-existing conditions are  excluded),

the insurer will pay you the LOWEST of

a) the amount you are insured for on your policy document (€20,194)

and

b) an amount equal to 75% of your income in the 12 months preceding your claim, less illness benefit (or other income)

From the New Ireland T&Cs:

New Ireland 75% income protection

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:

Stable income in the future

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

Increased income in the future

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

Reduced income in the future

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

In a nutshell, the maximum your policy will payout is the amount you are insured for. But it can pay out less if you are earning less when you make a claim.
If you feel your income is going to fall, you should reduce your cover. On the other hand, if you get a pay rise, you should increase your cover.

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.

Why can I only insure up to 75% of my income, why not 100%?

You must have some incentive to return to work.

Is income protection really worth having?

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.

See more on income protection v serious illness cover

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.

What are the exclusions that will prevent your policy from covering your income loss?

Exclusions vary between insurer so please be careful when it comes to choosing which provider you go with.

The cheapest isn’t always the best.

The following exclusions are common to all providers:

  • Pre-existing medical conditions you were aware of before taking out a policy
  • Disabilities or illnesses as a result of a criminal act
  • Self-inflicted injuries
  • Normal pregnancy and childbirth
  • Alcohol or drug abuse
  • War
  • Failure to follow medical advice

How sick do you have to be before income protection will pay out?

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.

Is there a limit or time-frame on how long your income will be fully covered when you are unable to work and does its scale back as time goes on?

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.

If I had income protection cover and I unexpectedly lost my job would they pay me the equivalent of my lost income?

This is important.

Income protection does not cover redundancy.

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.

If I have income protection from my employer, can I get another one as part of mortgage protection which will pay my mortgage while I am unable to work?

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

If I have income protection, can I also get social welfare/illness benefit?

Yes, if you are entitled to a social welfare payment, you will receive it in addition to your income protection payment.

What is the main advantage of having a separate income protection policy compared to life insurance and mortgage protection?

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.

My question is income protection for the self-employed – am assuming it’s a non-runner?

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.

Medical criteria

Invalidity Pension is a payment for insured people who are permanently incapable of work because of an illness or incapacity.
To qualify you must: Have been incapable of work for at least 12 months and be likely to be incapable of work for at least another 12 months (you may have been getting Illness Benefit or Disability Allowance during that time)

Or

Be permanently incapable 
of work (in certain cases of very serious illness or disability, you can transfer directly from another social welfare payment or from your job to Invalidity Pension).
So you can’t get it for 12 months, and you have to prove you can’t work for 12 more!

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

How much will income protection cost me?

Surprisingly less than you think.

It depends on your

  • Occupation
  • Age
  • Health
  • Smoker/non
  • Amount of cover
  • Waiting period
  • Retirement age
  • Income tax bracket

Read this article I wrote on the factors that influence the cost of income protection.

Does the cost of income protection change with age and what guarantee does I have that the modest premium I now pay will not increase to an unsustainable amount in future?

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.

Here I compare reviewable and guaranteed premium income protection.

Should we both get income protection? (Particularly if one partner earns more than the other)

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 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.

I was always wondering what insurance company should I have my policy with or maybe it does not matter because all insurance companies work the same way. If they are all different how would I know what company to take policy from?

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:

  1. Aviva – can insure a homemaker
  2. Irish Life – no minimum cover- suitable for lower incomes
  3. New Ireland – guaranteed payout even if your income falls
  4. Royal London – terminal illness benefit

What types of income protection are available in Ireland?

I’m currently on maternity leave, can I get income protection?

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.

I’m self-employed, what if I’m unable to work but I can still pay myself, can I 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.

Can commission and overtime be included or is this not taken into account as it varies monthly?

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.

How do I pay? Monthly or yearly? Is it cheaper to pay annually and is it by direct debit? 

You can pay monthly or annually. The insurer will offer a small discount (3,4%) for an annual payment). You can pay by direct debit or cheque/credit card.

If I have this for many years, for how long is the price likely to remain as per the quote?

Your price is fixed from the start unless you buy reviewable income protection. In that case, the insurer fixes your premiums for 5 years and reviews it every 5 years.

How does tax relief work on income protection and does it come back to me as part of a tax return or is it applied at payment?

Unfortunately, tax relief cannot be claimed at source, it comes back as part of your tax return, you claim the tax relief online here each year.

What’s the process for getting started? Do I just fill out some forms and pay or do I need to get a medical or similar?

It depends on how much cover you are applying for.
  • If you’re under 35 you can apply for up to €1000 cover per week without having to do a nurse medical.
  • Under 40, you can apply for up to €900 per week without a medical.
  • Under 45, up to €800.
  • Under 50, up to €700.
  • Under 55, up to €500
  • And under 60, you can apply for up to €400 income protection per week without having to do a nurse medical.

If you cover is below the limits above, you can get cover based on an application form alone.

If I leave Ireland can I transfer my salary protection to the country I move to? (I have no plans to do so – but you never know)

Afraid not, you won’t have an Irish income any more so nothing to protect. You can cancel your policy without penalty.

I assume that this only covers me for disability/injury etc. If I get in a position whereby I can’t find work any more (seems unlikely but you never know) I’d still have no way of getting social security etc. Is that correct?

Correct, income protection insures you against inability to work due to illness/injury/disability, not redundancy / lack of work.

Do you have any case studies from  people who have made an income protection claim?

Yes, here is Trudy’s story:

Can I have two income protection policies?

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.

How do I increase my income protection cover?

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.

Is my payout fixed even if I’m out of work long term?

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.

Over to you…

Please, please, PLEASE don’t just go for the cheapest quote.

Get some independent advice.

How to choose an income protection broker.

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.

Nick McGowan
lion.ie | making life insurance easier

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