Protecting your income
When I ask people what their biggest asset is, the chances are most will say it’s their home.
In some cases this might be true, but for the vast majority of us our greatest asset is our income and 85% of Irish people are not insuring their greatest asset.
So, how do you insure your Income?
Income Protection also sometimes known as Permanent Health Insurance (PHI) provides you with a replacement income if you are unable to work due to an accident, injury or illness.
It can replace up to 75% of your usual income less any social welfare payments when you’re off work. You pay a monthly premium just like any other insurance policy. This premium is determined by your age, occupation, deferred period and health status.
If you are absent from work due to illness or injury, your chosen Insurance company then provides you with a replacement income until you return to work, or until your chosen retirement date if you’re not fit to return to work before then.
Unlike a lot of other insurance products, if you make a claim, your policy will continue at no extra cost to you, meaning if you have to claim again in the future, your policy will still pay out.
It is a very important form of cover to have and should be the cornerstone of any long-term financial plan, as all financial plans require an income to fund them.
Most adults have some form of life assurance, yet statistically you are far more likely to be out of work sick for a long period than to die before you retire.
It’s a common misconception that the State will provide you with sufficient income if you are too ill to work. At the time of writing, the State Illness Benefit is €198.00 per week for a single person and so most people would need to top this up with a payment from an Income Protection policy to maintain their lifestyle.
New regulation now means that self-employed people are entitled to long-term sick pay, giving the safety net of a small income support to this group, however it is important that individuals take into account their own varying personal circumstances before taking out an Income protection policy.
Firstly, how much Income Protection do I need?
The maximum level of cover that you can insure yourself for is 75% of your earned income, this must include any State Illness Benefit you may be entitled to.
This limit is mainly imposed to prevent there being more of an incentive for you to stay at home sick than to be at work. That said, you can insure yourself for less than 75% if you wish, if you feel you could maintain your lifestyle on a lower amount, which would keep the cost of your cover down.
Do I get tax relief on my premiums?
Yes, It is the only type of Insurance on which the Government will give you tax relief at your marginal rate, this in itself tells you just how important this type of cover is. In effect, you can now use your tax bill to start paying for some of your Insurance costs.
So how does the tax relief actually work?
For example, let’s look at Jack, a 40-year-old non smoker, accountant, earns €60,000 per annum. He has chosen to protect 50% of his salary (€30,000 p.a.) until his retirement at 65. He selects a 6 month deferred period and chooses guaranteed, increasing premiums.
Jack's gross premium: €80.00 per month yet it only costs him €47.20 per month after tax relief at 41%.
What is a Deferred Period?
This is an initial waiting time at the start of your claim, It relates to the length of time between when you were last at work and when you start receiving a benefit. You can choose the length of the deferred period, usually 13, 26 or 52 weeks.
Simply put, the shorter the deferred period, the dearer the premium. Typically, people choose a deferred period that fits in with their employment or savings.
For example, if your employer will pay your salary for six months if you are out sick, you could choose a policy that will start to pay you after six months.
As another example, if you are self-employed but have enough savings to cover your living expenses for three months of illness, you could choose a policy that has a waiting period of three months
In summary, Income protection should form a key part of your financial plan. Take a moment to ask yourself, how would you cope financially if you were unable to work? Would you have a replacement income in place? how would you pay these normal household bills without an income? So protecting it makes sense!
Barry KerrCFP® is Managing Director of Wealthwise Financial Planning who have offices in Carrick-on-Shannon & Galway, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland #CI66141