Column: On the Money

Income Protection: Can you afford not to have it?

Conor Harte

Reporter:

Conor Harte

Email:

editor@leitrimobserver.ie

Income Protection: Can you afford not to have it?

Income protection also sometimes known as Permanent Health Insurance

We all fund our lifestyle by spending our hard-earned income. This income is used to feed ourselves, to pay mortgages, to pay all the bills and to fund our lifestyles; new clothes, nights out and holidays etc. Our income is also used to pay our insurance premiums and hopefully to pay towards retirement planning! So what happens if we get sick or have an accident and this income stops? This is where income protection insurance comes in.
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.
Income protection is a 'must have' product for a large proportion of the working population but particularly those who are self-employed. Not all companies have a sick pay policy and it is always important to check with your employer what the policy is. Self-employed people have the added cost of paying someone else to do their job for them. It should not be deemed a luxury purchase.
Just like any other insurance policy, you pay a monthly premium. This premium is determined by your age, term of the cover, occupation, general health and your chosen deferred period. If you are unable to work 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 many 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.
What are the issues that need to be considered before taking out an income protection policy?

How much Income Protection do I need?
That’s entirely up to you and how much you can afford. 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, which would keep the cost of your cover down.

Tax relief on my premiums
It is the only type of insurance on which the government will give you full tax relief at your marginal rate. In effect, you can now use your tax bill to start paying for some of your Insurance costs.
For example, a 40-year-old male non-smoker, accountant, earns €60,000 per annum. He has chosen to protect 50% of his salary (€30,000 pa) until his retirement at 65. He selects a 6 month deferred period and chooses guaranteed, increasing premiums. His gross premium is €80 per month yet it only costs him €48 per month after tax relief at 40%.

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. 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 be considered a necessity rather than a luxury for a large proportion of the working population. Most of us have some form of life Insurance in place, yet statistically we are far more likely to be out of work sick for a long period than to die before you retire.