Insurance that pays my salary when I get sick !
I think I may have heard of that before.
Income Protection Insurance. Permanent Health Insurance. Illness Income Cover. Yes, it has many different names but they all mean the same thing ! If you are unable to work because of any sickness, disability or injury, Income Protection can pay up to 75% of your salary.
This will be paid until you get back to work. Or if you are unable to work for years, this cover can continue to retirement age - potentially decades of cover.
I don't think I need Income Protection Insurance!
We have written before about how people view insurance products. In general, we resent paying money for things that might happen - although it may be logical to do so. There is a similar dynamic with making pension savings. It may make sense to do it but we are reluctant to do so. But not all insurance will be worthwhile for people.
There is an acceptance to paying insurance if it is legally required. We don't like paying car insurance but it has to be done. In an accident, we see the value of it. Mortgage protection and house insurance are all required when buying a house. Holiday insurance is generally accepted too.
But what about life insurance? Figuring out how much to leave for our dependents is something a lot of us are unsure about. Income Protection falls into the same grey area. Do you really need it? The only way to know is to know what the benefits and costs are. Then we can make a rational decision. Insurance may suit some but not others. But we should all at least know the risks and benefits.
Ok, ok - but anyway, my employer will pay my salary if I'm sick.
Check your contract! Please - do it now, before reading further! So many times people come to see us unaware of benefits they already have with their employer. Income Protection may be a benefit you have already.
Nope, not there. But surely my employer will cover me if I fall sick and unable to work?
There is no legal obligation on behalf of an employer to pay you anything. That doesn't your employer won't support you. For example, if you were self-isolating due to Covid, I would wager that it is unlikely that your employer would stop paying your salary.
But what if you were in a car accident? Or unlucky enough to have an illness that kept you out of work for months or longer. How supportive would your employer be then? Particularly when we know there is no legal obligation on them.
Doesn't the government cover me here?
Yes, there is support here. In fact, during the Covid crisis there was extra support for anyone unable to work due to being sick or self-isolating with Covid. The payment was €350 per week. However, before (and after) Covid, the support is €203 per week. For the majority of people, this will be not be sufficient to support mortgage / rent and a family - without a salary.
The support is equivalent to €10,585 on an annual basis. This is clearly far smaller than the average wage.
So how does the Income Protection work?
So, as we mentioned, 75% of your salary is paid until you are well enough to return to work or, otherwise, until your retirement. The payments kick in after a deferral period. For the deferral period, you can choose between 1 month, 2 months, 3 months, 6 months or one year. The cost for protection decreases as you extend the deferral period. However, for most of us, one year without any salary would be too difficult. There is a balance to be struck.
The idea is to get you to 75% of the position you were when you are working. The thinking is that some motivation is left to get you back to working. So let us see how it works on a salary of €50,000. You are in a car accident and unfortunately not in a position to work. After your deferral period, you are entitled to receive 75% * €50,000 = €37,500 on an annual basis. You will receive €10,585 from the government so the insurer will pay €37,500 - €10,585 = €26,915 per annum. This is a monthly payment to you of about €2,243.
But what's the difference between Income Protection & Serious Illness Benefit?
We have discussed Serious Illness Benefit in another blog. Serious Illness pays out a lump sum if you are diagnosed with one of the specific illnesses in the policy. It is cheaper. But a lump sum payment is a one-off and may not support long layoffs.
Income Protection is more comprehensive cover. It covers you whatever illness or sickness you have. It is more focussed on your ability to work. And then cover continues until you return to work. But it is more expensive.
So how much are we talking?
Yes, there's the question. Let's take the case of a 40 year old office worker on a salary of €50,000. They want to cover 75% of it and are eligible for the State Benefit also. We will take a deferred period of 3 months = 13 weeks.
The cost with one of the leading insurers is €97.11 and €59.24 after tax relief.
The premium payment is tax deductible?
Yes ! We saved some good news to the end. Although you pay €97.11 per month, it is tax deductible and so the effective cost is €59.24. You claim it back in your annual return.
Anything else I need to know?
An important assumption we made for the above pricing was that we were speaking about an office worker. This is a Class 1 worker for the purposes of Income Protection. Class 2 workers is light manual labour - like a shop worker or chef. Class 3 workers is skilled manual labour - surgeons/dentists. Class 4 workers is heavy manual labour like builders/tradesmen.
Clearly as we move up the classes, the risk gets bigger. It is far easier for a builder to suffer an accident in work than an office worker. And also more difficult for a builder to have a full return to work. This means the insurance pricing gets more expensive the higher the class of worker.
No rush. Take your time. We will lay out the costs of all the insurers in this market for you. There are some differences in the protection on offer but we will take you through them. We will explain how to claim your tax back. Then it's over to you !
Income Protection can give peace of mind particularly when we are supporting a family and a mortgage or rent commitment. It may even be possible to cut spending in another area so we keep our overall spending neutral.