Far more people buy life assurance than buy income protection cover. However it is approximately five times more likely that someone of working age will find themselves prevented from working by sickness or injury than that they will actually die. This is where income protection cover comes in. Contributions benefit from tax relief, which gives income protection significant additional value.
State illness benefit on its own is at most €188 per week (2015). For most, this would not be enough to pay a mortgage, bills and living costs.
Benefits of an Income Protection Policy
Typically an Income Protection Policy can pay out up to 75% of your earnings less State Benefits if you become too ill or injured to work. You must choose the level of cover that you want: the higher you want the payout to be in the event of illness or disability, the higher the monthly cost of cover will be.
How an Income Protection Policy works
For an Income Protection Policy to start paying out, three conditions must typically be met:
- You must have kept your premiums up to date when you were well
- You must be too ill or injured to continue working – typically in your own occupation
- You must have remained too ill or injured to work for the duration of a ‘deferred period’ chosen at the outset of the policy – typically 8, 13, 26 or 52 weeks.
Very few people want to claim income protection: most would far rather be well and working. Aside from the need for income, one of the biggest benefits of an income protection policy is that your insurer will typically try to assist you in rehabilitating yourself: after all, it is in their interests as well as yours.
However, for as long as you remain unable to work your Income Protection policy will continue to pay out. Payouts will cease only at the end of the policy term – this is selected at outset and is typically 65 years of age.
Additional benefits of an Income Protection Policy
Depending on the provider you choose, your Income Protection policy may have the following additional benefits:
- Facility to increase cover without having to provide new medical evidence
- Hospital cash benefit – a daily replacement income if you are hospitalised during the deferred period, before Income Protection payments start
- Partial benefit if you return to work and your earnings are lower than previously
Tax relief on contributions
Contributions to an income protection policy, up to 10% of your total salary, benefit from tax relief. If you are paying tax relief at the higher rate of 41%, a contribution of €100 to an Income Protection Policy will only cost you €59 after tax relief is claimed.
Who might an Income Protection policy be suitable for?
An Income Protection policy may be suitable for anyone who has an income to protect that is substantially greater than State Disability Benefits – i.e. more than €188 per week (2015). It may be particularly suitable if you have family who are dependent on you.
Who might an Income Protection policy not be suitable for?
An Income Protection Policy may not be suitable for you if:
- Your employer already provides adequate Income Protection
- You have sufficient means available to you to cope indefinitely if you become unable to work
- You cannot afford Income Protection premiums
- If you have a long-term illness, or have a history of family illness, you may find it difficult to obtain Income Protection on reasonable terms
Decisions to be made when buying Income Protection
When buying term Income Protection you should consider the following questions:
- How much of your income do you wish to protect?
- If you became ill, how long could you last without an income? If you could tolerate a long deferred period of 52 weeks, then your Income Protection premiums will be significantly lower than if you would need the policy to start paying out after 8 weeks.
- Do you want cover to increase over time to guard against the effects of inflation?
- When do you want the policy term to run to? Typically this should be the age at which your pensions will start paying out - if you do not have pension provision in place, this should arguably be higher priority than Income Protection.
Process of obtaining Income Protection cover
- You will be asked to complete an application form. This will include a number of medical questions.
- In certain circumstances, you may be asked a number of questions over the phone by a nurse or medical practitioner.
- In certain circumstances, for example if the cover you want is large, or if you have some health concerns, or if you are above a certain age, a medical examination may be required.
- Premium payments are typically monthly by direct debit.
- Tax relief can be obtained including an Income Protection Certificate with your tax returns. This will be included when your contract is issued.
Providing the right level of cover
Typically an Income Protection Policy pays out up to 75% of your Income less State Benefits. However there is no obligation on you to cover your maximum income. You will be able to reduce premiums by covering a lower amount. For this reason you should consider carefully how much income you would need if you were no longer working.
The Cost of Income Protection
The cost of income protection can vary depending on the following factors among others:
- Your age – the younger you are, the less cover will cost
- Your lifestyle – the healthier your lifestyle, the less cover will cost
- The amount of cover you require
- The period that you require cover for
- Whether you choose to add on additional cover to basic income protection – for example, specified illness cover or a provision for cover to increase with inflation
- The level of competition in the income protection market
Of these, age is one of the biggest differentiators. The following provide possible costs of €34,808 of Income Protection for a non-smoking man, with the policy running to age 65, a deferred period of 26 weeks, and a guaranteed premium. This amount might be suitable if the man in question earned €60,000 per annum.
- Age 25 - €34 per month
- Age 35 - €45 per month
- Age 45 - €81 per month
- Age 55 - €134 per month
Please note that these figures are merely indicative – the cost of cover for you will depend on your own choices and circumstances.
All other things being equal, you should always look to get the lowest premium available for the level of cover that you require. Mercer can help you to obtain this.
Guarding against inflation
You can if you wish guard your Income Protection policy against the effects of inflation:
- You can choose to increase your benefit by a percentage every year, typically 3% per annum. Note that your premiums will also increase.
- You can select escalation, in which case your income benefit will increase every year when it is in payment.
Answering questions on your health
Typically your insurer will need to ask a number of questions relating to your state of health. Broadly, the healthier, younger and fitter you are, the less Income Protection will cost.
You should always answer these questions truthfully to the best of your ability. For example, a smoker can easily reduce his premiums by saying he is a non-smoker. However this renders cover pointless: in the event of illness or disability, the insurer is highly likely to investigate the health records of the insured and will refuse to pay out if the questions have not been truthfully answered.
Income Protection for those with poor health
If you are trying to buy income protection and are in a poor state of health, one of two things is likely to happen. First, an insurer may agree to cover you, but may increase the level of premium that you have to pay. Second, you may be refused cover.
If you wish to take out Income Protection Cover, Mercer can help to provide you with the most competitive cover available to meet your specified needs.