We protect ourselves while we holiday, we protect our pets and we even protect our smartphones.
Yet we sometimes forget to protect what’s most important.
Our ability to earn an income is often our most important asset yet something some of us take for granted.
Paying your mortgage, childcare, groceries or even the insurance policies we mentioned above become a struggle without an income.
I’ll begin by noting that there are very few situations wherein neglecting Income Protection Insurance is a good idea.
Perhaps if you have huge wealth, a large reserve of savings, or regular passive income from assets. In that case, you can probably skip this article.
For many of us, that is not the case. Your income is likely your most important asset and should be treated as such.
It’s also crucial to avoid making the mistake of believing you can utilise your savings as a backup.
What we consider large savings will dwindle quickly. Let’s assume you have €25,000 sitting in a savings account.
I think we’d agree that most people would consider that to be a significant sum of money.
Now let’s look at a scenario where you become unable to work. Many people will need a minimum of €2,500 to pay their bills and living expenses.
That gives you a maximum of 10 months before your savings are gone. What happens after this if you are still unable to return to work?
In some cases you may qualify for the State Illness Benefit of €208 per week. For those who are self-employed you’ll be on your own.
The purpose of this article isn’t to scaremonger. I simply want to highlight the fact your savings will often not last as long as you’d imagine.
With Income Protection you get long-term protection. We’ll look at in more detail further on but your claim will pay out until one of two things happen:
- You are fit to return to work , or
- You reach retirement age
Depending on which of the above comes first. That means in theory you could be claiming income protection for twenty or thirty years.
This means the potential value of Income Protection far outweighs your monthly premium
What’s the average length of an Income Protection claim?
The average Income Protection claim is likely longer than you’d expect.
A recent study from Aviva shows the average Income Protection claim length is five years.
Due to the fact you can insure up to 75% of your salary, the length of the claim is significant. For example, let’s assume you earn €70,000 per year.
You’ll be eligible to cover €52,500. If you fell into the average and claimed for five years you’d be better off by €262,500.
This is a dramatic increase when compared with the State Illness Benefit of €208 per week.
We’ll use the salary above to compare having a policy versus not having a policy.
| Income Protection – Policy vs No Policy | |
| Income Protection in place | €1,093 per week |
| Income Protection not in place | €208 per week (State Illness Benefit) |
| Difference | €885 per week |
The table above highlights the long-term benefits of having Income Protection in place.
It is a safety net should you become unable to work. Having this regular income will allow you to maintain a certain lifestyle and focus on recovery.
What percentage of Income Protection claims are paid out?
The average Income Protection payout on claims is approximately 90%.
It is worth noting that an Income Protection claim is different from a car or household insurance claim.
There will be no arduous process of you trying to prove you did no wrong. The Life Insurance providers like to use the line that 100% of all genuine claims are paid.
This just means that unless you weren’t truthful at the application stage or didn’t make them aware of any significant changes since your claim will be paid.
For the self-employed, you will not require proof of salary so it is important that you can provide proof of previous earnings if required to do so.
How much does Income Protection cost?
Compared to the potential payout, Income Protection premiums are cost-efficient. You’ll also receive tax-relief at your marginal tax rate.
The cost of your premium will be directly related to certain factors. These include:
- Occupation
- Age
- Deferred Period
- Smoking status
- Retirement age
- Medical history
Of the above, the one that will affect the price of your premium the most is your occupation.
Occupations are rated by their level of risk and run from Class 1 to Class 4 with one being the lowest risk and four being the highest.
Class 1 | Class 2 | Class 3 | Class 4 |
Accountant / IT | Dentist / Doctor | Locksmith | Plumber |
The lower your class, the lower your monthly premium will be.
Let’s look at someone with a Class 1 occupation on €65,000 per year.
In this example, we’ll take a 36-year-old male, non-smoker with no underlying medical conditions.
Protecting 75% of this salary is €48,750.
Sum Assured | Premium | Tax Relief (40%) | Real Cost of Premium |
€48,750 | €72.04 | €28.81 | €43.24 |
This means you’ll protect 75% of your income for just over €10 per week or €2.50 per day.
Tax relief on Income Protection
The ability to claim tax relief on your premiums is one of the major benefits of putting Income Protection in place.
Claiming this tax relief will dramatically reduce the cost of your monthly premium. This is particularly the case for those in the 40% income tax bracket.
You can take out Income Protection both as a PAYE worker and a self-employed individual.
Both will be eligible for tax relief but will claim it in different ways. Below we look at the process of each.
Income Protection as a Self Employed person
Income Protection premiums can be paid through the company and treated as a business expense. From here it can be offset against corporation tax.
Some key points to keep in mind:
- The company can pay the premiums
- Tax relief at the corporate rate
- Payment in a claim made gross to the company
An important point above is how the claim is paid. The benefits will be paid gross to the company deducting the relevant taxes and paying the benefit to the employee.
As a self-employed person, you also have the option of paying the premiums from your salary and claiming tax relief that way but most prefer to pay it through the company.
Income Protection as a PAYE worker
As a PAYE worker, premiums are paid from your salary and you can claim tax relief at your marginal rate whether that is 20% or 40%.
Some key points to keep in mind:
- Premiums are personally paid
- Tax relief at the marginal rate
- The benefit in claim is paid directly to the policyholder and is taxable
You can then claim your tax relief through your online Revenue account. The steps are straightforward.
- Log in to My Revenue
- Click ‘Health’ on ‘show more’
- Select ‘Income Continuance’
- Add the details of your Income Protection Provider and annual contribution
- Click ‘Add’
You should then see the annual contribution amount.
How do I claim in the event of an accident, illness or injury?
In the event of a claim, you have a couple of different options. You can contact your provider directly, or you can contact the broker where you took out your policy.
Either will be able to assist and start the claim process.
The most important factor here is the deferred period you chose at the outset of your policy.
This deferred period must have lapsed before your benefits can begin to be paid. If you feel your illness or injury is likely to keep you out of work past this deferred period then it’s time to get the wheels in motion.
What details you need
There will also be some financial documents required. These include:
- Copy of your P60
- 3 recent payslips
- Certified accounts (Directors and Self-Employed only)
- Tax assessments (Directors and Self-Employed only)
What’s the alternative of not putting Income Protection in place?
Income Protection should always be your first choice. However, it may not be an option in some circumstances.
Perhaps your occupation or some medical issue has ruled you out.
In that case, a Specified Serious Illness Cover may be an alternative. Income Protection will pay you a long-term benefit if you’re unable to work.
Whereas, Specified Illness Cover will pay out a tax-free lump sum on the diagnosis of an illness outlined in your policy. This may help replace some lost income, pay for medical expenses or just assist you in maintaining a standard of living.
There are some important differences between Income Protection and Specified Illness Cover which we’ve outlined in more detail.
The other option is to rely on savings which we looked at the beginning of this article. This is an unsustainable option for many people, particularly long-term.
What are the next steps?
The first step is to take stock of your situation. How would you cover it if you become unable to work?
It’s human nature to assume it will never happen to you. Unfortunately, this isn’t the case and having a safeguard in place is important.
Statistics from Aviva show a healthy, 40-year-old male who is a non-smoker has a 46% chance of being out of work for one month or more before they reach retirement age.
If you’re an employee, check how long you’ll be covered by sick pay. It’ll likely be a lot shorter than you thought.
If you’re self-employed, it is important to put a plan in place. It’s unlikely you will be eligible for the State Illness Benefit meaning your income could be reduced to zero.
A good analogy is to imagine you had an ATM that printed money each month. Would you insure it? Of course, you would.
Earning a salary depends on you having the ability to go to work. Take advantage of the cost-effective premiums and tax-relief by putting a policy in place.
Income Protection will never be cheaper for you than it is today.
Should you need assistance in calculating the appropriate cover or would like to assess your options, you are welcome to contact myself or our team.
We deal with these queries on a daily basis and would be happy to assist.
I’ll leave my contact details below. Hopefully, this guide helped and has made the water a little less muddy!
Ian Kennedy QFA
Client Services Director
Client Services Director
Ian is the Client Services Director at emero Insurance and has worked within the financial sector for the past five years. If you would like to chat with Ian directly, please get in touch with him at [email protected]
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