What is Income Protection Insurance?
Income protection insurance is an insurance policy that pays out a regular cash payment (each month) that replaces part of your lost income if you are unable to work due to a medium to long-term illness or disability (It does not cover redundancy). It must also not be confused with private health insurance.
To qualify for this insurance, you must be in full-time paid work or be self employed. Cover can be obtained between age 18 and 59, and can reach age 70 with certain insurers.
Not everyone needs their income to start paying as soon as they are out of work. You can choose when your replacement income starts paying out. So if your employer pays you sick pay, you may only want your money to kick in after that.
The period in between your work ceasing and when the insurer starts paying you in known as the ‘deferred period’. You can choose how long you wish to delay the payment. It can be 1, 2, 3, 6 or 12 months (or 4, 8, 13, 26 or 52 weeks). The longer you wait, the lower your premiums will be.
Do I need Income Protection?
Consider this… You are put into a situation where an illness or injury stops you from working for a couple months or even years. You are trying to recover and get better, and in so doing you ask yourself, “where am I going to get the money to pay for my monthly expenses and commitments??”
Now sure, you may get some sick pay from your employer, or have some savings in the bank, however, that probably won’t nearly be enough to pay for expenses for medical treatments or pay off monthly bills such as your mortgage repayments, car insurance, utilities, weekly groceries, and children expenses & education (well let’s not go down that road…). Considering the weight of the above, you would indeed need sufficient income to support yourself and your family financially. Here, Income Protection has you covered!
You may also need income protection if you:
- Are self-employed and would have no source of income if you couldn’t work due to illness or disability.
- Have little or no sick pay from your employer.
- Have no ill-health pension protection.
- Have dependents who rely on your income.
- Have no other source of income.
- Do not have sufficient benefits to replace your lost income and/or cover your expenses.
When do people usually claim?
Aviva Claims Statistics: The main causes of Income Protection claims that were submitted in 2021 (by 2,000 claimants) were:
- Psychological – 25%
- Orthopedic – 25%
- Cancer – 20%
- Neurological – 7%
- Cardiac – 7%
- Other – 17%
People usually claim when certain medical conditions negatively affect their ability to perform their role at work. These can include the development of psychological (depression & anxiety), orthopedic, and cancer-related conditions. The above can cause serious distress for a person experiencing any of these and so time off work is needed to focus on healing, recovery, and/or rehabilitation.
How much cover can I get?
An Income Protection policy provides you with a replacement income of up to 75% of your annual salary before tax if you cannot work due to an illness or injury. Take into account that you would have to minus the state illness benefit that you are entitled to.
All insurers have a maximum annual limit on the amount you can claim, and is set at €250,000, with the exception of Aviva to which the maximum benefit is €262,500.
If you earn €80,000 per year (gross annual income) and you would like to protect 75% of your income, this would reduce the amount to €60,000.
€60,000 minus the state illness benefit of €10,816* (€208 per week X 52 weeks) = €49,184.
So the amount of income you will be able to insure every year is €49,184, or €4,099 per month.
If you are self employed and earn €80,000, you would be able to claim the full 75% (€60,000) as you are not entitled to the state illness benefit, giving you €5,000 per month.
*The amount you can qualify for depends on your average weekly earnings for the relevant tax year (in this case, 2022).
How much does it cost?
The cost of your Income Protection premiums are determined by the below factors:
The older you get, the higher the premium. They also increase as you get older on the Reviewable plan. If you want to keep your premium the same (level) throughout your policy then it may be worthwhile considering the Guaranteed Protection plan. This is a more expensive premium at first but usually cheaper over the long run.
Some jobs a higher risk than others. Class 1 jobs are lower risk and so allow for lower premiums. With jobs that fall within Classes 2, 3 and 4 usually pay a higher premium given that there would be more factors on the job.
- Class 1: Accountant, Solicitor, Computer Programmer
- Class 2: Hairdresser, Dentist, Bookmaker
- Class 3: Driving Instructor, Social Worker, Locksmith
- Class 4: Plumber, Garage Mechanic
If you smoke, your premiums will be higher than if you are a non-smoker. If you have smoked tobacco products in the last 12 months, you are considered a smoker.
Medical History / Pre-existing Conditions:
When applying for protection, you will be asked questions about your health. If you have a condition that carries a level of risk, you may need to pay a higher premium or have an exclusion added to your policy.
If you would like your cover to increase annually alongside inflation, this will also increase your premiums each year (usually by 3.5%).
Amount of Cover:
Simply put, the higher the cover, the more you pay. Your income and the percentage of cover will have an affect on the cost.
When you claim, the longer you delay/defer your payment the less you will pay (as mentioned above).
When applying for cover it is important that you answer the above questions honestly and as accurate as possible. If you should happen to claim from your policy and there is information that you did not disclose when applying, you may not receive any payout.
Additional Benefits of Income Protection
Many of the following benefits that come standard with one provider may have an extra charge with another provider – so its important to always use a broker to compare quotes across the market. The following can be included:
Specified Illness Benefit:
If this benefit is included in your plan it allows you to claim a once off lump sum if you are diagnosed with a specified illness listed in the policy.
Life Cover Benefit:
Certain plans can provide you with a lump sum payment in the event of your death. This would be an additional benefit for family members who would need to continue paying bills, mortgage repayments, or funeral costs, and so providing relief through a challenging time.
Terminal Illness Benefit:
If you are diagnosed with a Terminal Illness and you have less than 12 months to live, your payments will start immediately.
Continuation Option / Job Change:
If you move jobs or become self-employed within the term of the plan you will have the option to continue your policy without any underwriting (showing new medical evidence).
Insurers offer guaranteed premiums on the plan. Once the policy is accepted, your premium remains at the same level throughout the plan.
Guaranteed Increase Option:
This provides the opportunity to increase (top up) your cover at specific intervals without additional underwriting (further questions about your health, job, etc). The increase applies to the original cover amount each time.
Waiver of Premium:
This benefit allows you to pause your monthly premiums while making a claim on your policy. You would thereafter continue paying your premiums when you return to work.
Back to work Benefit:
This benefit provides extra support after a set period when you return full time after being off for a qualifying period, e.g., over 12 months.
This provides you with a partial benefit if you return to work part time or on a lower income due to a disability or illness, thereby bridging the gap in your earnings.
Hospital Cash Benefit:
This provides a daily replacement income if your are hospitalized during the deferred period.
Rehabilitation & Guidance:
Insurers like Zurich and Aviva are really stepping up their game in an effort to ensure that clients who are covered under their plans are well looked after and are in need of medical advice, assistance, and counselling.
Under Zurich protection plans, clients have access to a team of rehabilitation nurses who will go to meet you in your home and help put a plan in place to get you back to work. They also fund the costs of treatment with local physiotherapists or psychologists/counsellors which they can arrange in conjunction with your own GP, or pay for a specialist doctors visit to help you to avoid a long waiting list and get better quicker.
Aviva include a number of different benefits under their plans at no extra cost including the following:
- Best Doctors Second Medical Opinion – If you are faced with a medical problem, and you need guidance on your diagnosis or treatment, this service provides a second medical opinion from a panel of 50,000 world-renowned experts to ensure that you are diagnosis is in fact accurate. This can certainly offer peace of mind given the stress of going through a medical challenge.
- Aviva Family Care Mental Health Support – This is their counselling and psychotherapy service for people who are struggling with a bereavement, overwhelmed, stressed or anxious, feeling down, depressed or lonely, and are in need of help managing the emotional impact of life events, etc. Their Mental Health Support service offers quick access to tailored mental health advice from qualified psychologists.
Income Protection for the Self Employed
Personal Income Protection is for the self employed or those who are in a job that doesn’t provide an income protection plan and want to set up a policy independently of their employer.
This will pay out a regular cash payment that replaces part of your lost income if you cannot work due to a medium to long-term illness or disability.
With Personal Income Protection you can get tax relief at your marginal rate on the premiums you pay.
Claiming tax relief is really important as it reduces the cost to you by the rate you pay tax at – so either 20% or 40%. For example, if you are a higher rate tax payer, a monthly premium of €50 would effectively only cost you €30 as you would claim tax relief at 40%.
Income Protection for Company Directors
Executive Income Protection is a cost-effective solution that allows employers to provide income security for company directors in the event of an unforeseen illness or injury in their business.
This plan works similarly to an ordinary income protection policy offering a replacement income, only difference being, the executive income protection is taken out and paid for by the business on behalf of the Director or employee. In the event of a claim, the benefit is paid directly to the company who continues to pay the employee or director through PAYE whilst they are unable to work.
Protected Pension Contributions:
In addition, the Income Protection plan can also allow for the cost of pension contributions to be covered. Contributions can be protected up to 33% of salary to a maximum of €50,000. The policy will also ensure employer pension contributions are maintained whilst claiming on the policy.
In the event of an insurance claim, the insurance company will pay your benefit directly to you, after tax, USC and any other relevant deductions.
The premiums that are paid for by the employer qualify as an allowable business expense that can be offset against corporation tax.
If you need to claim, the insurer will pay the income benefit to the employer, who passes it onto the employee through salary, making any relevant tax and USC deductions. With a tax deductible premiums, you will continue to be paid while you’re unable to work.
Why do I need a Financial Advisor?
Compare the Market:
Save time and the stress of guessing who the best insurer is. We quote all providers across the market to ensure you have a plan that is best suited to your particular needs.
If you have a current plan, we can review your benefits to see if you are getting the most out of your plan.
Save you Money:
We could help you to reduce the cost of your premium. For example, if you have stopped smoking for the last 12 months you could get a premium discount of up to 50% off your current premium.
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