Income protection insurance policies generally cover any illness, injury, accident or disability that prevents you from working, writes FIONA REDDAN
LOSING YOUR income is a nightmare situation most of us try not to think about. However, given the current economic environment, it is never far from most people’s minds, as the numbers out of work continue to rise. But while losing your job might be your biggest fear, illness or disability can also restrict your ability to work, thereby dramatically reducing your monthly income.
One way of protecting your income is to insure against you losing it. According to a survey conducted by Irish Life, only 23 per cent currently have income protection cover, even though 74 per cent of Irish adults are worried about protecting their income.
Illness or disability is something that can strike at any time, so if you are among the 77 per cent without cover, income protection might be a financial product you should consider, particularly given the reduction in the period of eligibility for social welfare illness benefit following the last budget. However, income protection policies are not for everyone and, before you buy more insurance, you need to understand clearly how such policies work, and whether or not they meet your own personal needs.
The Irish Life survey notes that the average age of people claiming income protection is 45; however, one-fifth of all claimants are under the age of 35.
The latest statistics from Irish Life show that the average claimant receives income replacement for five years and eight months, with an average payout of more than €105,000. In 2008, the largest individual payment was €150,000 to a 50-year-old man who couldn’t work as a result of epilepsy, while the youngest recipient in 2008 was just 24. He received €19,000 in income replacement following a road traffic accident.
In 2008, the average annual payment was €18,982, which equates to an average payout of more than €105,000 over the period of a claim. The proportion of claims accounted for by men and women is broadly even, but the average male benefit (€22,774) was higher than was the case with women (€15,003).
What is income protection insurance?
Income protection is an insurance policy which pays out if you lose your income due to an accident or long-term illness. It is also sometimes called permanent health insurance.
Like other types of insurance, you pay a premium each month, which provides you with a replacement income should you find yourself unable to work. The payments continue for as long as you are unable to work because of your illness or disability, you die, or you reach the age of 55, 60 or 65, depending on the policy.
While claiming benefit, you do not have to pay the monthly premium and you can claim as many times as necessary during the life of the policy. Income protection benefit is treated as income, so income tax is payable on it.
Who is income protection for?
If you are in full-time paid work, or are self-employed and would find it difficult to survive without your monthly income, you might consider getting income protection cover.
Firstly, you should assess how much income protection you might already have. Many employers offer long-term sick pay, or you could have ill-health pension protection, which allows you to take early retirement with a pension if you become permanently unable to do your job.
You should also factor in how much you would get in social welfare illness benefit. The current maximum yearly allowance is just €10,623.60. However, while this used to be available until you were fit for work, it is now only payable for up to two years for anyone who applies after January of this year following a change in last year’s budget. If you are self-employed, you may be particularly vulnerable, as you will not have any protection from your employer and you will not be entitled to the State illness benefit either.
Who offers income protection?
There are a number of insurers offering income protection policies in Ireland, including Friends First, Irish Life, April Insurrect and Canada Life. Policies are available directly from the companies or via an insurance broker.
Apart from price, there are other differences between the policies on offer from the different insurance companies. For example, Irish Life requires you to inform it if you change occupation, while Friends First’s policies do not carry this stipulation.
How much does it cost?
The cost of your policy will depend mainly on the level of your cover, the “deferred period” and the term of the policy you want. After that, the main factors are your age, gender, health, family medical history, job and lifestyle, and whether you want a reviewable or guaranteed option.
The older you are, the more expensive your policy will be, while women can also expect to pay more than men, as statistically they are more inclined to suffer ill-health. If you choose to have your policy indexed – whereby your level of cover is increased in line with inflation – your monthly premiums will also increase each year. You can also index-link your benefit so that the cash amount paid out to you during a claim will increase regularly. Again, you can expect to pay an extra premium for indexing your benefit.
In general, a male 40-year-old looking for cover on €40,000 could expect to pay about €100 a month, if he agrees to a six-month deferred period. This cost is before tax relief is factored in.
Does my job affect the cost?
The riskier the insurance company perceives your job to be – ie, the more likely you are to have an accident or illness at work – the more expensive the policy.
For example, if your job is mainly desk-based work, such as accountancy, computer programming or banking, you will be considered the lowest risk. Farm workers, plumbers and landscape gardeners are in the most risky category and therefore will have to pay increased premiums. According to Irish Life, the top five occupational categories with claims in payment during 2008 were manufacturing, secretarial, banking, transportation/logistics and tradesman.
What is the “deferred period”?
Most policies have a “deferred period”. This relates to the length of time you need to be out of work before you can claim against your income protection policy. The periods range from 13 weeks to 52 weeks, and the longer the period you choose, the cheaper your policy will be – although surviving without income for a full year is rarely a practicable option. Even the minimum deferred period equates to three months.
What is the difference between a reviewable and a guaranteed policy?
The main difference is cost. Under a guaranteed plan, your rates will remain the same for the duration of the policy, (unless you change the level of cover), but you pay a higher price for the certainty. While a reviewable policy may initially be cheaper, the insurer has the right to increase rates, as rates are only fixed for the first five years of the plan in general, and may increase at each fifth anniversary of the plan.
For example, the cost of income protection for a 30-year-old male (€50,000 benefit, 13-week deferred period, non-smoker) at Irish Life would be €83.02 a month under the reviewable option, but would cost an extra €21.53 a month for the guaranteed option.
What happens if I’m made redundant?
You can only claim on your income protection policy if you are unable to work due to a disability or illness. If you are fearful of being made redundant, you will need additional cover in the form of a redundancy protection policy.
What might prevent my claim being paid out?
It is vitally important to read the small print when taking out a policy, as not all types of illness or accident are equal when it comes to eligibility in triggering the policy. According to Irish Life, 90 per cent of its customers’ claims are met and the company says it pays out €52 million a year in replacement income for more than 3,000 customers.
But if you don’t want to be in the 10 per cent who are unsuccessful, be sure to fully understand the terms of the policy before signing up for it.
According to Irish Life, the top five illnesses recorded for claims in payment in 2008 were mental illness, back pain, cancer, heart- related conditions and diseases of the central nervous system.
However, some policies do not cover all of these complaints. For example, April Insurety’s income protection policy does not pay out in the case of mental illness, including stress or backache, unless you have radiological evidence. The policy also does not pay out in the case of elective surgery or a pre-existing condition.
Some of the exclusions at Irish Life relate to situations where you may have given incorrect information at any time, or if you change occupation and do not tell the insurer. Insurance companies can also refuse your claim if it is caused directly or indirectly by your involvement in a criminal act or drug or alcohol abuse.
I already have critical illness insurance – do I also need income protection?
If you already have a critical illness policy, you may wonder if you really need an additional income protection policy. However, critical illness policies only pay out in the case of a number of specified illnesses, whereas income protection policies generally cover any illness, injury, accident or disability that prevents you from working. Therefore you have a better chance of being successful with your claim under an income protection policy. In addition, critical illness pays out a lump-sum, whereas income protection pays you a regular income until you are ready to return to work.
Are premiums eligible for tax relief?
Unlike critical illness policies, tax relief, at your highest rate of tax, is given on income protection premiums up to an annual limit of 10 per cent of total income. If you are part of a group scheme, relief is granted at source, while if you have an individual policy you will need to include the information in your tax return.
For those paying tax at the higher rate of 41 per cent, the relief significantly reduces the cost of premiums. For example, Friends First charges €56.51 a month for cover of €25,000 (50 per cent of income) for a 30-year- old male civil engineer. With the tax relief, the monthly cost comes down to €33.34.
How much can you expect to get?
If you make a claim under an income protection policy, the insurer will pay you the proportion of your earnings which you have insured with them, less any other payments you get when you are out of work, such as sick pay or social welfare disability benefit.
Irish Life pays out 75 per cent of the first €80,000 earned and 50 per cent of any remuneration earned above €80,000, up to a maximum of €150,000.
The maximum benefit at Friends First is calculated as 75 per cent of the first €82,000 of your earnings plus 33 per cent of the balance, subject to a maximum of €164,000.
At Canada Life, benefit is subject to a maximum of 67 per cent of total earnings, up to €950 per week, while April Insurety will insure up to 60 per cent of earnings if you’re employed, and 60 per cent of net profit if self-employed.
Take the example of John, who has 75 per cent of his annual salary of €50,000 protected. This gives insured benefit of €37,500 a year or €3,125 a month. He gets sick pay of €1,000 from his employer, as well as social welfare illness benefit of €884, which means that the insurer will provide benefit of just €1,241 a month.
However, if John was self-employed, he would not be entitled to either sick pay or social welfare benefit, and so would receive the full €3,125 a month from the insurance company.
Could I be over-insured?
As shown in the example of John, the insurer only makes up the balance of the claim, so there is a risk that by taking out an income protection plan, you could be over-insuring yourself if you are employed, on a low salary and are eligible for sick pay.
For example, if Seán earns €30,000 a year, and protects 50 per cent of this, he is insured for €1,250 a month. However, as he has the requisite PRSI stamps, he is entitled to social welfare benefit of €885.30 a month, while he also gets sick pay from his employer of €500 a month. These bring his income while out of work up to €1,385.30 a month, which means the insurance company will not contribute anything, and his policy is of no use. However, as sick pay is likely to only be for a defined period, and social welfare now only lasts two years, his policy will kick in when these payments end, so would be of use if he is out on long-term leave.
