If you have good health, are working and earning an income then you are your very own money tree!
We’re all familiar with the phrase “Money doesn’t grow on trees”, but what if it did?
What if you owned a money tree, and day in and day out it sprouted money. What lengths would you go to protect it? Would you insure it? I bet you would. Let’s say your entire lifestyle is based on what you get from this money tree, it might be your only source of income, what if one day it just stopped producing money without any advance notice or warning… what would you do then?
This is not a fairytale, If you have good health, are working and earning an income then you are your very own money tree!
Have you put in place protection for your earnings that if in the event of illness, injury or disability you could not work? If not, why? If you had the aforementioned money tree you would have protections in place, right?!
Income protection gives you money each month until you can work again. While you are healthy, you pay a premium every month, or each year if you prefer. If you are unfortunate to fall ill or become injured and are unable to work during the term of your plan, you can then make a claim and receive a monthly income until you are well again.
For example, if back pain means you can’t work, or if you are unable to work due to mental health issues, if a car accident puts you in hospital, or if you are diagnosed with cancer and need time out for treatment – income protection will help support you until you can work again. In simple terms, it gives you an alternative income while you are unable to work.
How much of your Income can you insure?
You can cover up to 75% of your earnings less any State Illness Benefit which you may be entitled to. Cover is capped at a maximum of 75% because there must be some incentive for you to return to work.
How long before the cover starts paying out?
Not everyone needs their replacement income to start as soon as they are out of work. For some people, their employer may pay sick pay for a specific period of time, you might only want your money to kick in after that ends. The time in between when you stop working and when the life company will start paying you is called your deferred period. You can choose how long this is: 4, 8, 13 or 26 weeks are the most common. The longer the deferred period you chose, the lower your premium will be.
How long does the cover last?
This is the age at which your plan finishes – we call it the ceasing age. You can pick any age between 55 and 70 years.
What are the different types of Income Protection?
Personal Income Protection is for those who are self-employed or in a job that doesn’t provide an income protection plan for you. You pay the premiums personally and then get tax relief at your marginal rate on the premiums you pay (much like a Pension contribution). It's worth noting that this is the only type of Insurance that you will ever get Tax relief at your Marginal rate, this in itself indicates how important this type of cover is. If you need to make a claim, the life company providing the cover will pay your income protection benefit directly to you, after tax, USC and any other relevant deductions.
Executive Income Protection is designed for employers who want to provide an income protection plan for employees.
The premiums are paid for by the business/employer and qualify as business expenses that can be offset against corporation tax. If you need to make a claim, the life company providing the cover will pay the income benefit to your employer, who then passes it onto the employee through salary, making any relevant deductions such as tax and USC
We all have numerous Insurance policies in place protecting our Car, House, gadgets and even our Pets yet when it comes to putting in place safeguards to protect our most important asset, our incomes, we are very poorly prepared. In my view Income Protection is the single most important aspect of Financial Planning, are all, your Income is what underpins all other aspects of your financial plan.
In summary, it’s very easy to take for granted your ability to earn an Income when things are going well but ask yourself how you might cope if this were ever to change.
Barry Kerr CFP® is Founder & Managing Director of Wealthwise Financial Planning who are based in Carrick on Shannon and Galway. 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 #CI6614
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