What are the Benefits of Income Protection?
Protecting what matters most.
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Eoin Cullen BBS Msc QFA Grad. Dip CFP
- August 23, 2022
For many of us, our income is our most important asset. Your mortgage, rent, childcare, gym memberships. All these cost money and for most of us, they are paid using our earned income.
It’s for this reason Income Protection is so valuable. Money isn’t the be-all and end-all. Nor should it be.
But whether we like it or not, our income plays a huge role in our lives. As the cost of living increases, having a regular income has never been more important.
Hopefully, you’ll never be in a position where you are unable to work due to an illness or injury.
However, should that day arrive, having a backup plan could save a tremendous amount of emotional and financial stress.
The good news is that putting an Income Protection policy in place is likely cheaper than you think. Our recent survey showed respondents overestimated the cost by an average of 34%.
The ability to claim tax relief on your Income Protection premiums is a huge benefit. None of us enjoy paying taxes.
So to have the opportunity to protect yourself and your family financially while paying less tax is a massive win for most people.
We’ve written this guide to demystify Income Protection. We outline some of the benefits we feel are most important.
If there’s anything that’s unclear as you read you’re welcome to pick up the phone or drop us an email.
6 Benefits of Income Protection
Income Protection provides a number of useful benefits. Among them:
1) Tax relief
The first and likely most advantageous benefit of an Income Protection policy is the ability to claim tax relief on your premiums.
The tax relief will be at your marginal rate. Simply put, if you pay 40% income tax, you’ll be eligible for 40% tax relief.
This will massively reduce the ‘real’ cost of your policy.
For example, let’s say your premium is €100 per month.
Monthly Premium | Tax Relief (40%) | Real Cost |
€100 | €40 | €60 |
The above highlights the magic of tax relief. All of a sudden your premium has dropped to €60 per month. For just over €2 per day, you’re protecting a large percent of your income (up to 75%)
At this point, you may be wondering how exactly you claim this tax relief.
The process of claiming tax relief on Income Protection will depend on the type of policy you have in place.
Luckily, we’ve written an in-depth guide that breaks down the exact steps to follow. It’s a fairly simple process and after reading that guide you’ll know exactly where you stand.
2) Cost Efficient
Our surveys show many of us overestimate the cost of Income Protection.
However, when tax relief is applied, it is extremely cost-efficient.
For example, let’s take a 38-year-old male, non-smoker, IT consultant. Their details are as follows:
- Salary: €80,000
- Amount of cover: €60,000 (75% of their total salary)
- Deferred period: 26 weeks
- Cost of premium: €16
- Covered until a retirement age of 65
The above is without applying tax relief.
Premium | Tax Relief | Real Cost |
€104.16 | €41.66 | €62.49 |
Now we see the dramatic impact the tax relief has on your Income Protection premiums.
In this example, for €15.62 per week, you are securing €60,000 per year should you be unable to work due to illness or injury.
Unfortunately, many of us underestimate the risk of us being unable to work at some point.
However, Aviva’s risk calculator shows a 38-year-old male has a 42% chance of being unable to work for one month or more before reaching age 65.
The alternative to not having Income Protection is usually two options.
- Rely on savings – a risky strategy as even substantial savings will dwindle quickly. Even €20,000 savings is now less than 50% of the average annual wage in Ireland.
- The State Illness Benefit – Currently sitting at €208 per week or €30 per day.
As the cost of living rises, everyone would struggle to live on either of these alone. That’s without adding in a mortgage, rent, childcare, or standard living expenses.
If we compare the State Illness Benefit to our Income Protection example the difference is startling.
The policy with €60,000 cover per year will cover you for €1,153.84 per week.
That’s a difference of €945.94 when compared with the State Illness Benefit.
3) Long Term Cover
Long-term cover is a huge benefit of having Income Protection.
None of us like the thought of being sick or unable to work for an extended period of time. However, it is a reality for many.
Aviva’s claim statistics show the average length of an Income Protection claim is five years.
This highlights the importance of Income Protection and how it can act as a safety net.
If you are an employee, your employer may pay you for a set period of time. If you’re lucky, this may be weeks or months.
If you are self-employed, you will have no entitlements. Therefore, Income Protection is particularly important.
Regardless of your employment status, it is vital to have a plan to cover monthly expenditure should something untoward happen.
Compare Income Protection Insurance
At emero, we compare Ireland’s leading Insurance providers.
4) Covers any illness or injury
Income Protection will cover you in the event of any illness, injury or disability that stops you from working.
The causes range from cancer to a back injury. If it stops you from doing your job, your Income Protection policy will pay out.
This is where Income Protection has a major advantage over the likes of Specified Illness Cover. Specified Illness Cover will only pay out when you are diagnosed with an illness outlined in your policy.
In some cases, there may also need to be a severity of illness before you can claim.
In 2021 alone, over €70 million was paid in Income Protection claims.
5) Cover up to 75% of your salary
Whether we like it or not, our salary plays a significant role in our lives.
The rise in inflation and the cost of living has only heightened this.
An Income Protection policy allows you to cover up to a maximum of 75% of your salary.
As with anything, there are limits. These will differ by insurer but most allow a max sum assured of approximately €250,000 per annum.
Provider | Deferred Period | Max Age at Entry | Max Term Age | Max Sum Assured |
Royal London | 4,8,13,26 or 52 weeks | 60 | 70 | €262,500 |
Aviva | 4,8,13,26 or 52 weeks | 54 | 65 | €262,500 |
Zurich | 4,8,13,26 or 52 weeks | 60 | 70 | €250,000 |
Irish Life | 13,26 or 52 weeks | 54 | 65 | €250,000 |
New Ireland | 8,13,26 or 52 weeks | 60 | 70 | €250,000 |
6) Hospital cash
Some providers such as Aviva and Royal London offer ‘hospital cash’ as a free additional benefit.
This will pay you a daily replacement income if you’re in the hospital for more than seven days during your deferred period.
This can relieve some financial stress during your stay in the hospital allowing you to focus on getting better.
It also means you do not have to wait out your full deferral period to begin receiving an income.
What is a deffered period?
The deferred period is the amount of time you have to be out of work due to injury or illness before your benefits begin to be paid. These periods differ in length and the period you choose will directly affect your premiums. Cover periods include 4, 8, 13, 26, or 52 weeks.
Am I eligible for Income Protection?
Your job will directly impact your eligibility for Income Protection.
Each occupation is given a class rating from 1 to 5 with class 1 being the lowest risk.
Class 1 occupations include those with no manual labour such as an accountant, solicitor, or IT consultant.
Those in class 1 occupations will have significantly reduced premiums.
Occupations in class 5 are the highest risk. Anyone in this classification will not be eligible for Income Protection.
Anyone in class 3 or 4 occupations will likely be hit with a higher premium than those in class 1 or 2.
Other factors that affect the cost of your premium include:
- Your age
- Health status
- Family history
- Deferred period
- Smoking status
- Sum assured
Looking to learn more?
Feel free to visit our in-depth guide explaining how much Income Protection costs.
Industries where Income Protection is most popular
Income Protection is particularly popular among certain sectors, industries, and occupations.
These include:
Each of these fall under class 1. This means a combination of lower premiums and tax relief makes Income Protection an attractive offering.
Although we have a dedicated page for each of the above, there are often nuances.
Speaking with a member of our team is the best course of action. It gives us a chance to assess your situation and you a chance to ask any questions you may have.
From here you’ll have a better understanding of whether Income Protection may be a good fit for your situation.
What's the risk of not having Income Protection?
Income Protection is like most insurance policies. Ideally, you’ll never need it but it provides peace of mind that it’s there as a safety net should the day arrive.
None of us plan on becoming ill but unfortunately, it’s part of life. Paying a very small percentage of your salary each month can save a lot of heartache and financial stress.
It’s something we see with clients who have claimed on their Income Protection policy. Relief is the most commonly used word.
From a monetary standpoint, if you have nothing in place you’re likely planning to survive on the State Illness Benefit.
€208 per week will not go too far. However, it’s the potential long-term stress. Perhaps you have significant savings.
But could you afford to not have a salary for an extended period of time? 6 months, 12 months, or two years?
This is when people begin to struggle. At least with Income Protection, you have the security and peace of mind.
You will receive your benefit payment until you can return to work or until you retire. Whichever comes first.
What should I do from here?
Hopefully you now understand Income Protection in more detail.
It’s a fairly simple product but important nonetheless.
The next step is to take a look at your own situation. You’ll need to self-assess and ask yourself some questions.
- Am I or my family dependent on my earned income?
- Would I be able to cope financially if this income stopped? If so, for how long?
- If employed, how long will my employer pay me while sick?
- If self-employed, do I have provisions in place to cope?
A combination of answering the above as well as speaking to your financial advisor will put you in a much better position.
At emero, we understand the value of Income Protection which is why we write guides such as this to bridge the knowledge gap.
If you are considering Income Protection there will likely be other aspects to consider. Deferred periods and sum assured just to name a few.
Although 75% of your salary is the maximum you can cover, it may not be necessary in all cases.
Perhaps 50% may be sufficient. It may be enough to cover your mortgage and basic living expenses.
This is why speaking to an advisor is important. If you’d like myself or one of our team to assist, you are more than welcome to contact us via the below.
We look forward to hearing from you!
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.
About the Author
Eoin Cullen BBS Msc QFA Grad. Dip CFP ®
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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