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.
| 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 |
We’ll use the salary above to compare having a policy versus not having a policy. 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.
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.
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.
