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Income Protection: everything you need to know before signing on the dotted line

June 12 2018 7.5 min read Income Protection

what_is_income_protection_why_should_i_buy_it

2.3 million Australians, or 18.5 percent of the working population, have taken an ‘illegitimate’ sick day in the past year, according to jobs website Adzuna.com.au.

Transplant that same percentage to Ireland and you’d be looking at around 575,000 people pulling sickies. While the maths isn’t an exact science, it’s probably a reasonably accurate estimate for how many of the good folks of our little island are taking duvet days.

It’s appealing: stay snuggled in bed, wrapped around your blankie – especially if you have young kids who think 5am 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?

Income Protection: in plain English

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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 percent 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: Dad 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.

Do you actually need Income Protection?

The average cost of a house is €368,356.

The average wage in Ireland is €45,075.

Let’s assume the average Joe has 20 years to retirement. In that time, they’ll earn the guts of €1m. That’s a lot more than your average house.

And yet everyone with a house has Mortgage Protection and Home Insurance.

And okay – that’s because you can’t buy a house without Mortgage Protection, but you also shouldn’t buy a house without Income Protection!

Your salary is probably your most important asset. If you lose it, you’ll be stuck with state benefits – which maxes out at €198 a week. That’s a lot of Match Attack stickers, but it’s not great for much else.

Income Protection: mini FAQ (or everything you need to know)

Now that you know what Income Protection is, it’s time to dive into it.

How much income is protected?

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 on the average salary of €45,000 and you’re entitled to illness benefit of €198 per week (€10,296 per year).

The maximum you can receive in total from the state and from your insurance company is 75 percent of your income.

That breaks down into €10,296 illness benefit from the state with the balance of €23,454 from your insurer.

€10,296 + €23,454 = €33,750 (75% of €45,000).

And still they gazed and their wonder grew how one small head carried all he knew,

as Mr Cusack, my accountancy teacher used to say.

I got an F in accounting, I kid you not.

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 your premium but you’ll only pay the lower tax rate on your claim (basically, if your earnings drop dramatically).

And it’s still an awful lot more appealing than trying to survive on the €198 the state pays.

What kind of policies are available?

In very broad terms, there are two ways to get an Income Protection policy: buy it yourself or hop on board a work/group scheme.

Group/work schemes can be cheaper and you’ll need to provide very little medical information. That’s grand if your case is straightforward and you want to tick the basic box of cover. An individual policy, however, will be tailored towards your specific needs.

Basically, read your group policy and compare it with any individual policies (may I suggest a broker?) and make an informed decision either way.

What’s the deferred period?

The deferred period is a waiting period before your cover kicks in. It usually goes: 4 weeks, 8 weeks, 13 weeks, 26 weeks, or 52 weeks. The longer the deferred period, the lower your premium.

Just be really careful when you choose the deferred period.

26 weeks or even 52 weeks might not sound that bad, but g’luck explaining to your very precocious five-year-old why he can’t have the things he wants because Dad has no money.

You should have listened to him when he sat you down, bowler hat and suitcase in hand and said, “Dad, 8 or 13 weeks probably makes the most sense for our financial situation.”

Before you choose your deferred period, check what your employer’s rules for sick pay are. They might actually cover you for a few weeks, which can bridge the gap in cost.

How long does it last?

Ultimately: until you return to work, reach the end of your term, retire, or die. (Insurers really have a thing around dying.)

The length of your term will affect the cost, a policy that ends at 55 will have a lower premium than one that ends at 70.

Are there any additional benefits?

Obviously, the big benefit is the replacement income. However, some policies offer additional benefits too.

Friends First, for example, offers tailored rehabilitation and exercise programmes. Irish life has LifeCare benefits whereas Royal London has Helping hand Benefit, back to work benefits and it offers cover up to the age of 70.

Basically, have a read through all the policies before you sign anything. (Another reason to go with a broker as you’ll have access to all the information and they’ll explain everything to you in simple English.)

Will my current chronic illness or medical issue be covered?

No, unfortunately.

This is the part where I remind you that, ultimately, insurance is a money-making racket for the men in suits in the fancy glass buildings. (Scoundrels and blaggards, the lot of them.)

However, you can still cover yourself for all other illnesses or issues – and that’s a lot of illnesses.

How much does salary protection cost?

It depends.

That might sound like a bit of a cop-out, but it’s true. It does depend.

How much cover will you need? What’ll your deferred period be? What’s the length of your policy?

That’s the basic trio of questions, but other factors will include your age, health, lifestyle, and any medical history. Also smoking, because those little carcinogenic sticks are always, always, always a blight to the cost of insurance.

In the meantime, let’s look at an example.

Joe is 40 and married with kids. He makes the national average salary of €45,000 and he wants to cover himself for 10 years, give or take. He’s an acupuncturist (why not?) and the deferred period is 13 weeks.

what_is_income_protection_why_should_i_buy_it

To get your quote, head over here to our new-fangled Income Protection calculator.

Occupation plays a big part in the cost of Income Protection too.

Let’s pretend that Joe is a chimney sweep (Chim chiminey Chim chiminey Chim chim cher-ee!), which is a Class 4 (the most dangerous class). He’d be looking at a supercalifragilisticexpialidocious quote, starting at around 90 quid.

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For most people though, once the tax relief kicks in, Income Protection is pretty damn affordable. In the example where Joe is an acupuncturist, he’ll be paying a little over €6 a week – which is peanuts when you consider the ultimate benefit.

€6 a week.

Sure when you think of it like that…

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.

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

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