So far you’ve been lucky.
It hasn’t stopped working.
Like clockwork, it cranks out the good stuff.
Minute after minute, day after day, tick tock, tick-tock.
You’ve heard some scare stories.
The Kelly’s machine has been out of action for 6 months, the Flynn’s hasn’t worked for over a year.
But your machine is fine.
Someone had tried to sell you insurance for the machine, but you just couldn’t afford it at the time.
Anyway, at that time the machine was brand new, state of the art, unbreakable.
But you worry because the machine isn’t as young or robust as it used to be.
What if something happened to it?
What if it slowed down…. and stopped…. forever?
What if your money machine couldn’t produce long term?
How would you cope?
Think about it for a second.
If you had a machine in your house which spat out your income every month, would you insure it?
Of course, you would.
It would take a
stupid foolhardy person not to.
You, dear reader, are 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 safeguard that income with income protection cover, the costs of which we analyse here.
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?
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 him money to buy Match Attack stickers 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.
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.
As long as you’re out of work due to any illness, injury or disability, you’re covered.
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 are you entitled to in Ireland will be an eye-opener.
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 questions so excuse the language!
You can insure up to 75 percent 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 €230 per week (€10,556 per year).
The maximum you can receive in total from the state, your employer, and from your insurance company is 75 per cent of your income
That breaks down into €10,556 illness benefit from the state with the balance of €49,444 from your insurer.
€10,556 + €49,444 = €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 €203 the state pays.
If your occupation is Class 1, 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 that 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.
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 in confidence.
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.
If you’re still on the fence about the need for income protection, have a read of this case study from the UK. Some of my providers also offer the support services mentioned here. You’re not just insuring an income, you’re making sure you’ll get the help you need to get you back to work.
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 payout 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.
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, if you can’t get back to work due to a pregnancy-related complication, you can make a claim.
Illnesses or accidents that stop you 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 4 months but your deferred period is 6 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
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 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.
If I were to become ill with, say, stomach cancer. I recovered and returned to work after 2 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.
If it’s a new condition, you have to serve the deferred/waiting period.
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 piece 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 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 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 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 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 the inability to work due to illness/injury/disability, not redundancy/lack of work.
Yes, here’s Mark’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.
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.
When you make a claim, the insurer will request proof of your income over the preceding 12 months.
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 in order 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 don’t just go for the cheapest quote.
Get some free advice!
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.
Or if you want a chat first, please schedule a call here
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