Income Protection - why it should be your goal for 2023

Think about all the items in your life that you begrudge paying for. Some of the items on this list might be paying tax, paying to get your greys covered at the hairdressers, parking tickets, or that 100th person who has come knocking on your door looking for sponsorship even though you’ve already spent a week's salary on donations!

This is how many people view buying income protection or specified illness cover; grudgingly. It is something we don’t want to pay for as we hope that day will never come; it’s an expense we hope we never need, especially when we are young and healthy, but often this is the exact time to take it out…as will become apparent.

Ask yourself if you have ever taken out gadget insurance… have you ever even considered it? Perhaps you have! Gadget insurance is commonly taken out because people can visualise not being able to live without their device - we don’t want the inconvenience of life without our phone, even briefly. Now ask yourself if you have ever taken out income protection cover. Some people will say yes here, but the majority will say no. Your greatest asset - the one thing that allows you to have ALL the items you deem worth insuring, is most likely, uninsured. WOW!

Why is this the case?
Firstly, lets take a look at what Income Protection is:
Often people think that health insurance is the same as the various types of financial insurance products available. This is NOT the case. Unfortunately, whilst health insurance is a great product in itself, it pays for hospital bills and medical emergencies, it does not pay your other bills; rent, food, mortgage, utilities, savings etc and keep your life going as usual outside of your medical situation.

With income protection, should you be unable to work due to illness or injury, you will continue to receive up to 75% of your income until you can get back to work. This, like all types of financial products, comes with conditions. To be eligible, you need to be employed a minimum of 16 hours per week. Yes, it is available to the self employed (the cohort of people who probably need it most), and it is weighted based on how risky your job is. So for example, a solicitor has a less risky job than an electrician and will pay less for their premium.

Income protection is offered on the basis of having a deferred period. This means the time between you get sick and get your first payment. The longer you are willing to wait to get your first payment, the less the policy will cost. Usually deferred periods are between 4 and 52 weeks. If you have some savings, usually it is possible to push the deferred period out to keep the cost of your income protection policy down. One of the major positives about income protection is that it can negate that other expense many of us begrudge; income tax!

Income protection is the only protection product you can ever have that gives you tax relief at the tax rate you are charged at. So if you are taxed at 20% you get 20% tax relief on premiums, and the same for taxation at 40%. It’s one of those rare win-win situations in that you are protected, and getting money back in your pocket at the same time!

The first step to putting income protection in place is usually a meeting with your financial advisor. He/she will look at your income and expenditure, take into account any sick pay schemes you might have access to, and evaluate the gap that needs to be filled in the event of a loss of income. When getting cover for loss of income, you can then make an informed decision as to what percentage of your income you need or want covered (up to 75%) in a realistic manner, whilst choosing a protection policy that you can afford.

One thing to consider is the cost of income protection rises with age, so it will never be cheaper to take out than right now! Another advantage about income protection is that if you take it out today at, for example, age 34, the cost remains the same regardless of future medical conditions, whereas the later you leave it there will be a likely 7% rise in the premium cost for every year you wait.
With regards to pre-existing conditions, let’s say for example that you needed hip replacement surgery in the past - in this case, rather than the premiums going up, your hip will usually be excluded from the policy, so there will be no pay-out based on this as it was pre-existing. None of us are getting any younger, so that means that “today” is always the best day to purchase income protection!

In addition, the age limit for income protection is 59 (as if you needed another reason!).
Many people fear redundancy. However, this is usually somewhat controllable by being able to work. You are still in the position to earn an income based on securing work. Your loss of income can also be somewhat offset by paring back on spending. Being unable to work due to illness or injury is a completely different story. All of a sudden, you are in a position where you have large medical expenses, hospital parking, potential house modification requirements, childcare needs…the list goes on and on. In addition, your spouse or another family member may have to look after you, meaning time off work, less income for them, affecting the household budget.

You may have some basic benefits, but if you are real with yourself, you understand that this would come nowhere close to filling the gap left by your inability to work. No, we do not want this to happen. We think it will never happen (or not to us) but yes, it does happen.
Now ask yourself, how long could you survive without your income? Based on research from a few years ago, Irish consumers were asked how long they could cope without an income; 44% said they could manage for 3-6 months, 30% said they could cope up to a year, and less than 8% said they would be able to get by for 2 years or more. When compared to income protection claims, the average duration of these claims was 6.5 years. There is a massive gap here as you can see. People are not giving proper consideration to the cold hard facts when it comes to living without an income.

We could be forgiven for thinking of protection products as an unnecessary expense, with rising energy costs, increasing inflation. We want to make sure we are being prudent, investing wisely, not wasting money, however protecting our main asset is the most prudent move you will make in your life. Protect your income and you can live with the peace of mind that you can always afford to keep your most important assets. Make it your New Years resolution to protect you and your family with an income protection policy.

For more information and advice on what strategy is best in your circumstances, speak to us here in Wealthwise Financial Planning.