emero » How much does Income Protection cost?
How much does Income Protection cost?
- Eoin Cullen BBS Msc QFA Grad. Dip CFP
- August 10, 2022
The cost of an Income Protection Insurance policy will vary depending on several factors. It is a tax-efficient way of ensuring you do not have to rely on the State Illness benefit or savings should you become sick or injured.
Without our income, many of us would struggle to pay even basic living expenses.
Therefore, protecting your most valuable asset should be on top of your list of priorities. Thankfully, more and more people are realising the importance of having Income Protection Insurance in place.
There has been a notable shift in recent years with the number of people setting up Income Protection Insurance rising dramatically.
Income Protection Insurance is eligible for tax relief at your marginal rate. This is a significant factor and should be considered when deciding on putting a policy in place.
1. Occupation
Your type of occupation will directly impact the cost of your premiums. Some jobs are riskier than others and your premiums will reflect this.
Class 1 | Class 2 | Class 3 | Class 4 |
Accountant | Dentist | Locksmith | Plumber |
As we see in the table above, income protection occupation classes range from 1-4.
Class 4 is seen as the highest risk with class 1 being the lowest. These classes will have a dramatic impact on your premium. There are also some occupations that will be automatically declined such as a farmer or crane driver.
Below we compare two people with identical details but different occupations looking to take out an Income Protection policy.
Age | Smoker | Salary | % of salary covered | Retirement Age | Occupation | Deferred Period | Premium (after tax relief) |
36 | Non smoker | €70,000 | 75% | 65 | Accountant (class 1) | 13 weeks | €66.24 |
36 | Non smoker | €70,000 | 75% | 65 | Mechanic (Class 4) | 13 weeks | €171.13 |
As we see from the table above, the occupation class was the only change yet the policy increased by €105. This is because the insurers judge those in higher-numbered classes to have riskier occupations.
The other side of this is that a 36-year-old, non-smoker in a class 1 occupation can protect 75% of a substantial income for just €16.50 per week.
2. Deferred Period
The deferred period agreed in your policy will be another major factor when it comes to the cost of your premiums.
This deferred period is the period of time between the first day you are unable to work due to sickness/injury up until your policy benefits begin to payout.
For example, should you choose a 13-week deferred period, your income protection policy will start once you have been unable to work for 13 weeks due to sickness or injury.
The shorter the deferred period, the more likely your premiums are to rise.
3. Smoker status
Whether you do or do not smoke will affect your premiums. Statistically, non-smokers generally have better health.
A smoker is considered someone who has smoked within the previous 12 months.
The difference in premium between a smoker and a non-smoker can range anywhere from 20-50% depending on the situation.
Below we look at an example of a premium quote for a smoker vs a non-smoker. The age, occupation, date of birth, retirement age and income are all identical.
Premium | |
Non -Smoker | € 58.85 |
Smoker | € 71.87 |
The above example shows how the premium increased by almost 20% when the applicant was a smoker.
4. Retirement Age
When choosing your policy, the age you choose for retirement will influence the cost of your premiums. Whether that age is 55,60,65 or higher, the younger the retirement age, the cheaper your premiums.
This is simply because there is less time for you to become sick or injured and unable to work.
5) Percentage of Salary
The percentage of your salary you would like to cover will impact your premiums. In some cases, you may need a higher percentage. This percentage will be agreed upon at the outset of your policy.
This should be judged on a case-by-case basis. The maximum percentage of your salary you can cover is 75%.
Salary | Max cover available (including State Illness Benefit) |
€70,000 | €41,684 |
The above would be for a PAYE worker who is employed by a company. Cover for self-employed individual works differently.
Salary (Self-Employed) | Max cover available |
€70,000 | €52,500 |
As a self-employed individual, you would not be entitled to the State Illness benefit of €10,816 per year. This means you cover yourself for €52,500 rather than €41,684 as per above.
6. Health and medical history
If you currently have had any previous medical issues, this may affect the cost of your premiums.
In some cases, you may be asked to complete additional medical questionnaires. If you are concerned a health condition or previous history may impact you being insured, it may be worth contacting our team.
Monthly premium examples for Income Protection Insurance
Below we look at some examples of what premiums you may expect to pay. We have broken it down by age and kept all other variables the same.
Age | Smoker | Salary | % of salary covered | Retirement Age | Occupation | Deferred Period | Premium (after tax relief) |
35 | Non-smoker | €80,000 | 75% | 65 | Accountant (class 1) | 13 weeks | €73.46 |
40 | Non-smoker | €80,000 | 75% | 65 | Solicitor (Class 1) | 13 weeks | €95.69 |
45 | Non-smoker | €80,000 | 75% | 65 | Doctor (class 1) | 13 weeks | €125.70 |
50 | Non-smoker | €80,000 | 75% | 65 | Accountant (class 1) | 13 weeks | €162.21 |
As we see from the above, the only aspect that changed was age. The occupations changed although they all remained in Class 1.
However, we can see how the premium increases as the age of the applicant rises.
If you would like to see how much Income Protection would cost, feel free to use our online quote system.
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Is there anything else I should consider?
Putting Income Protection Insurance in place may be one of the best decisions you make. It will give you and your family peace of mind should something happen.
It will provide a regular income and allow you to pay overheads and continue a similar lifestyle.
A simple question to ask yourself is: What would happen if my income suddenly stopped?
Many people may automatically think that savings could be used. However, even substantial savings will dwindle quickly. The average monthly income in Ireland is approximately €3,600. This means to cover even 6 months’ salary you would need to have over €21,000 saved.
If you would like to ask any questions or discuss how Income Protection works, feel free to contact our team. We specialise in this area of financial advice and would be happy to assist.
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Key Takeaways
- Your occupation will be the most important factor when assessing the cost of Income Protection Insurance.
- Smoking could potentially increase the cost of your premiums by up to 50%.
- You will be eligible for tax relief on contributions by your marginal rate of tax.
Eoin Cullen BBS Msc QFA Grad. Dip CFP ®Director
Eoin is a Certified Financial Planner CFP® who has been providing advice to his clients for over 16 year’s having held senior advisory positions in some of Ireland’s well known financial companies.
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