What is Income Protection?

Income protection, also known as Permanent Health Insurance or Salary Protection, is an insurance plan, which can be provided either through employment or personally, to protect the individual’s earned income, in the event of the inability to work due to accident or illness. Many of us grossly undervalue the income that we earn and underestimate the extent to which our financial circumstances can swiftly change as a result of such events .. In reality, most of us would find it very difficult to keep up to date with our day to day living expenses if we were to be out of work for a period of more than 3-4 months.   

How Does Income Protection Work?

Income Protection provides you with a monthly income, if you are out of work for more than a certain period of time (commonly referred to as the deferral period). This deferral period is usually set at 13 weeks, but can be set at 4 weeks, 8 weeks, 26 weeks or 52 weeks, depending on your own situation or the structure of a comprehensive Occupational Retirement, Death & Disablement scheme. For example, many public sector employees would have a deferral period at 26 weeks as they would be paid for their first 6 months’ absence. Some self-employed individuals set their deferral period at 4 weeks as their income would stop immediately if they were unable to work. As a general rule of thumb, the cost of your income protection is less expensive, the longer the deferral period that you have set.  

Income Protection kicks in for someone when they are out of work for longer than their deferral period. It then provides them with a regular income (usually set at 75% of their gross income minus the state disability benefit if an Employee) every month until they return to work or reach their nominated retirement age.  By having a plan like this in place, you have peace of mind in knowing that your income would continue regardless of your ability to work. This is particularly comforting if you have a young family and commitments such as a mortgage and loans which have to be paid monthly.  Additionally, such income is independent of an Employer as same is insured as opposed to discretionary.  

What Does It Cover?

Generally, most income protection plans cover you for any accident or illness that puts you out of work as long as you are medically certified. Certain people may have exclusions on their plan e.g., if they had a pre-existing condition before they applied for the cover. In instances such as this, cover may be accepted, but the life company would put an exclusion for that ailment. Under many Occupational plans, a level of Free Medical cover is available, providing such benefits regardless of one’s health status. 

How Much Does Income Protection Cost?

The cost of income protection is based on a number of factors:   

  • Your age when applying 
  • Your smoker status 
  • Your general health 
  • The deferral period you select 
  • The cease age (age at which your policy would stop – 55, 60, 65, and 70 are the usual options) 
  • Your occupation 

All the above factors are taken into account when determining cost. For income protection, your occupation can sometimes mean that you may not be able to get the cover at all. Certain high-risk occupations are automatically declined as the risk of accidents is too high.  

Tax Relief

Another major advantage of Income Protection is that you can claim tax relief on your premiums at your marginal rate. Therefore, if you are a higher tax rate payer, you can claim 40% tax relief on your premiums, which reduces the net cost significantly.  The relief available on contribution is limited to 10% of total income at the marginal rate. 

How Do I Know If I Need Income Protection?

To answer this question, you need to look at your current income and how that income would be impacted if you were out of work long-term. For example, an individual earning €80,000 per year would drop down to €11,440 per year if they had to rely solely on the state benefit while they were out of work. This might be ok in the short term, but any prolonged period out of work could cause severe hardship. Bills would continue to come in every month (mortgage, car loan, insurance, heating, electricity etc.) very few would not find themselves under pressure to keep up with them. With income protection, you’d have the peace of mind that you’d still have a level of predetermined income coming in to keep on top of all the outgoings.  

Are There Any Pitfalls?

Ensuring you are getting tax relief on your contributions is important. You generally need to get in touch with your local tax inspector and let them know you are paying into an income protection plan (tax cert provided with your policy documents will prove this). Review your plan regularly. Over time your income may increase significantly, especially with promotions etc. At this point, you need to review your income protection to ensure that it matches your current situation. The completion of a household budget spreadsheet focuses the mind on the necessity for adequate protection. There can be big variances in costs quoted by different Insurers for income protection. At Insight Private Clients, we work with our clients to find the most suitable plan for them, given their individual circumstances and tailor it to their needs.  

Should you have any queries on this area, please contact our Senior Consultant, Billy O’Shea.