Of all the cover I discuss with clients, income protection is the one people most often decide against, and the one they most often regret not having. The reason is simple. It insures the thing every other part of your finances depends on: your ability to earn.
What it does
If illness or injury stops you working for longer than an agreed waiting period, an income protection policy pays you a regular income until you are back at work, until you reach the end age on the policy (usually your planned retirement age), or until the policy ends, whichever comes first. The State pays Illness Benefit at a flat weekly rate, and only if your PRSI record qualifies. For most people it is a long way short of their salary.
The policy is limited by Revenue to 75% of your earnings, less any State Illness Benefit you receive, and providers set a maximum annual benefit on top of that. The 75% figure is deliberate: you should be slightly better off working than claiming.
The deferred period
You choose how long you will wait before the policy starts paying: typically 4, 8, 13, 26 or 52 weeks. This is the biggest lever on the cost. If your employer pays full salary for six months when you are sick, a 26-week deferred period covers you from the point your employer stops, and the premium is far lower than a 4-week policy. If you are self-employed with no sick pay at all, a short deferred period is worth paying for. Match the deferred period to what you already have.
What it costs
There is no standard price, and I would be wary of any website that gives you one. The premium depends on your age when you take it out, your occupation (insurers group jobs into classes by risk), your health and whether you smoke, the amount of cover, the deferred period, and the age the cover runs to. The premium is usually guaranteed for the term of the policy, so taking it out younger locks in a lower rate for longer.
The tax relief
This is the part most people miss. Premiums on an income protection policy qualify for tax relief at your marginal rate of income tax, on premiums up to 10% of your total income for the year. If you pay tax at 40%, a premium of €100 a month costs you €60 after relief. At 20%, it costs €80. When you compare income protection with other cover, compare the net cost, not the gross.
The flip side is that the benefit, when it is paid, is taxed as income. That is why the cover is set at 75% rather than 100%.
What it does not cover
Income protection does not pay out if you are made redundant or lose your job for any reason other than illness or injury. That is a separate product, and one that is much harder to find in Ireland. It also does not pay during the deferred period, and it does not pay for conditions that were excluded when you applied.
Read the definition of disability in the policy. Most good policies cover "own occupation", meaning you are covered if you cannot do your own job. Some cheaper policies use "any occupation" or "suited occupation", which means you may not be paid if the insurer decides you could do some other work. The difference matters enormously at claim time.
If you have cover through work
Many employers provide a group income protection scheme. Check three things: whether you are actually a member, what percentage of salary it pays, and what happens if you leave the employer. Group cover is often good and often incomplete, and it ends when you do. It is common to top it up with a personal policy, or to hold a personal policy so that a job change does not leave you uninsured.
How to decide
Ask yourself how long you could pay the mortgage and the bills if your salary stopped tomorrow. If the answer is measured in months rather than years, and you have no employer sick pay beyond the statutory scheme, income protection should be near the top of your list. If you have dependants, it sits alongside life cover as the foundation of a protection plan.
I review existing cover as well as arranging new policies. If you are not sure what you have, or whether it is enough, get in touch and we will go through it.