Why ignoring Income Protection could spell disaster for you

Mondays are usually pretty awful.

It’s a new week and there are five more days to get through until the weekend.

And that’s if you’re lucky enough to work nine-to-five.

If you’re a nurse and you’re into your third night shift and you still have several days to go, it must be tempting to pull a sickie.

It’d be so easy to call your boss, cough pathetically down the line, and tell them you just can’t make it in.

Unfortunately, it’s not really an option, as you’ve got lives to save.

Of course, you could go the opposite and take a ridiculous amount of sick days. An Enterprise Ireland employee spent a spectacular 19 years on sick leave while a former local authority worker hit the news recently for an unfair dismissal case; his employers alleged he’d missed 202 days of work on sick leave between 2011 and 2016.

That’s not a bad auld set of holidays – but most employers aren’t quite so giving.

Sick pay: from work

Like the look of those 202 days off? Prepare to be fired.

Unfortunately, an employee has no right under employment law to be paid while on sick leave.

Let’s repeat that for absolute clarity: you’re not actually entitled to be paid while on sick leave.

At all.

Now, most employers aren’t so bad and they’ll decide at their own discretion (i.e. to the extent to which they’re arsed) what their policy on sick pay and sick leave is.

If you have no idea what you’re entitled to, but you can ask. Here’s the legal bit:

under Section 3 of the Terms of Employment (Information) Act 1994, your employer has to provide you with a written statement of terms of employment (including info on sick leave) within two months of starting your job.

Sick pay: from the state

This is known as Illness Benefit, which you can get from the Department of Employment Affairs and Social Protection. You’d have be under 66 (ageism, I say!) and satisfy the PRSI conditions.

The amount of Illness Benefit you’re entitled to depends on how much you earned in an average week before you got sick.

In real terms, that looks like this:

Weekly payment from March 26th 2018 for claims started in 2009 or after

You’ll notice that it caps out at just under €200 or €131.40 for a qualified adult. (A qualified adult is someone you are married to or living with as husband and wife and who you are wholly or mainly maintaining.)

G’luck maintaining your lifestyle on that.

Look, Illness Benefit is fine if you get a bad infection and you’re out for a few weeks, but what happens if you get cancer or another illness that means you won’t be able to work for months? Maybe you’re hit by a car and it’ll take the guts of a year before you can get back to work.

How will you pay your mortgage and bills, and for all the other nice stuff you buy to make life seem more bearable?

Income Protection: how does it work and do you actually need it?

Income Protection (also known as Permanent Health Insurance / Salary Protection / Income Continuance) can pay you up to 75 percent of your before tax income (minus the state Illness Benefit) if you’re unable to work. If you’re working full-time or are self-employed, this could make a serious difference to your life.

Let’s say you earn €80,000 per annum. You can insure up to 75 percent of this less the state Illness Benefit of €10,296 per year.

If you’re self employed, you’re not entitled to any Illness Benefit so you can insure the full 75 percent of your pre-tax income.

75% x €80,000 (minus €10,296) = €49,704

So you can insure €49,704 using Income Protection. If you’re unable to work, you claim €49,704 from the insurer and €10,296 from the state giving you a total annual income of €60,000

This lets you concentrate on getting better without constantly worrying about how you will keep your head above water.

Some workplaces offer a group scheme wherein you’ll be covered under the terms of their policy. If your workplace is scabby and doesn’t offer any Income Protection, you can buy a policy yourself.

The deferred period (also known as the waiting period) is important: how long do you need to be out of work before the Income Protection policy kicks in? You can usually choose a deferred period of 4, 8, 13, 26, or 52 weeks.

Your cover will be cheaper if you have a longer deferred period – but is the few extra quid a month really worth surviving for a whole year on the government’s measly Illness Benefit?

Let’s look at an example real quick: Jane, a 26-year-old chemist on €45,000.

She wants to see how much she might pay with various deferral periods for 75 percent cover until she’s 55.

A four-week deferral period gives her the quote:

A 13-week deferral period looks like:

If she waits the full year, she’ll pay:

As you can see, there’s a significant difference between the pricing at 4 weeks versus 52 – but could you afford to wait that long?

In this instance, Jane picks the 13-week deferral period with Friends First as work will pay her for the first 3 months if she can’t work. She can easily afford the €27.80 payment especially as it’s actually only costing her €16.68 once her 40 percent tax relief kicks in.

If you’re curious about how to claim tax relief on income protection / permanent health insurance, take a look at the graphic below:

In some cases, the cost of your cover might also be impacted by factors like your age, health, medical history and lifestyle. (Smoking is the devil for life insurance.)

Your occupation may cause increases too – and I don’t mean if you do something bananas like working as a bullfighter.

Occupations fall into categories from Class 1 to Class 4. Class 1 is your fairly standard office worker, who’ll be sat at the desk all day while Class 4 is more dangerous and includes people doing a lot of physical work like Life Insurance brokers builders.

The hard truth

Look, if you’re young and single and footloose and fancy-free, you could probably survive without Income Protection. Worst comes to worst, you could move home for a year or two and get by.

It’d be grim, but you could do it.

However if you have kids or a mortgage or loved ones to look after, the state’s Illness Benefit won’t really cut it. You could probably muddle through for a few weeks, but do you really want to be worrying about finances while you’re trying to get better?

You’re going to feel awful already and the stress of the financial stuff definitely won’t help.

If you’re not sure if it’s really worth it, why not give the Income Protection quote calculator a whirl and take it from there?

Over to you…

There are five Income Protection providers in Ireland and each offers different benefits.

Make sure you get independent advice on all of the insurers.

Income replacement is the major benefit of these policies but of utmost importance is how the insurer handles your claim and what rehabilitation and retraining benefits are available on your policy. You’ll be amazed how quickly you want to get back to work.

If you’re considering buying Income Protection, complete this questionnaire and I’ll come back to you asap.

Nick McGowan
lion.ie | making life insurance easier