Income protection insurance

Income protection insurance pays out a regular cash payment that replaces part of your lost income if you can't work due to a medium to long-term illness or disability. It can also be called ‘permanent health insurance' - but is not the same thing as private health insurance. Income protection insurance does not cover redundancy.

How does income protection work?
Do you need income protection?
Are you eligible for this cover?
How much does it cost?
How much income will you get?
How much tax relief do you get on your premiums?

How does income protection work?

Most income protection policies pay out a benefit if:

• you are unable to work due to an illness or disability and 
• you do not have a second job.

You get your benefit only after you have been unable to work at your job (and are not working at any other job) for a set period. This is called 'the deferred period'.  When you take out your policy, you can choose what deferred period you think would suit you best, from 13 weeks, 26 weeks or 52 weeks. If you choose a deferred period of 13 weeks, which means you must be unable to work for 13 weeks before the income protection payments will begin, it will cost more, because your benefit would start sooner than if you chose 26 weeks or 52 weeks. Before you make a decision on the deferred period, check if your employer offers sick pay and if so, how much and for how long.

Do you need income protection?

You may need income protection if:

• you are self-employed and would have no source if income if you couldn't work due to illness or disability
• you have little or no sick pay from your employer
• you have no ill-health pension protection
• you have dependants who rely on your income
• you have no other source of income or money
• benefits you may be entitled to would not be enough to replace your lost income and/or cover your normal expenses

Before you take out income protection, you should check if you are entitled to other benefits, which may mean you don't need to avail of income protection such as:

• social welfare disability benefit - a weekly payment you can get from the state. It is not available if you are self-employed
• sick pay - your employer pays all or part of your wages for a time or
• an ill-health retirement pension - this lets you take early retirement with a pension if you become permanently unable to do your job. If you are a member of an employer pension scheme, you may be entitled to get this type of pension.

Are you eligible for this cover?

To have income protection insurance cover you must be in full-time paid work or be self-employed . You can get this cover by:

• joining a group scheme if one is available at your workplace or
• taking out an individual policy

It is usually cheaper to join a group scheme and insurance companies do not normally need as much medical information on employees in a group scheme. With an individual policy, insurance companies can look for detailed medical information

How much does it cost?

Costs will depend mainly on :

• the amount of your cover (usually linked to a percentage of your income)
• the deferred period and 
• the term (length) of the policy you want.

After that, the main factors are your age, gender, health, family medical history, job and lifestyle.

Your job affects your premium because some jobs are riskier than others. Insurance companies put jobs into classes, and charge different premiums for each class. People with ‘Class 1’ jobs are considered the lowest risks and would pay the lowest premium. People in classes 2, 3 and 4 usually pay a higher premium, while people in class 5 may be refused cover as they are considered too high a risk.

Classes of jobs

As your age also affects your premium, don’t cancel your policy to take out a new one unless you have a good reason. As you get older, income protection will cost you more and a new policy may have more exclusions, particularly if your job or state of health has changed.

Remember to pay your premiums on time. If you don’t, your policy could lapse and you would not be able to make a claim.

How much income will you get?

If you are insured through a group scheme, you get the proportion of your earnings stated in the group policy, less any other payments you get when out of work, such as sick pay or social welfare disability benefit.

If you have an individual policy, you can set the amount you want to be insured for when you take out the policy. The policy terms and conditions will tell you the maximum amount you can claim. This is usually 75% of your earnings before you became ill or disabled, less any other income you get while out of work, such as sick pay.

For example, Joe is an employee earning €40,000 a year. He has income protection insurance for €30,000 a year. The policy will pay up to a maximum of 75% of the amount he was earning before he was unable to work, less any other income or benefits he is getting.

Joe puts in a claim to his insurance company and starts to receive his payment after 26 weeks, which is the deferred period. Joe must tell his insurance company about the other benefits he is getting while he is out or work. These are:

• €750 sick pay per month from his employer
• a social welfare disability benefit of €750 per month.

What benefit will Joe get?

So, although Joe was insured for a benefit of up to €2,500 per month, he can only claim €1,000 per month because of the other benefits he is getting.

If Joe was self-employed, he would not receive social welfare disability benefit or sick pay from his employer. His maximum benefit would be the same as his insured benefit - €2,500 per month.

Any actual calculation will differ depending on your individual policy, social welfare disability benefit and sick pay entitlement.

Usually your benefit payment stops as soon as one of the following happens:

• you return to work
• you reach age 55, 60 or 65, depending on the policy.  This is called the ‘benefit cessation age'. This should be no later than your planned retirement date.
• the insurer's medical officer, who may check your medical condition from time to time, decides that you are fit to return to work or
• you die.

How much tax relief do you get on your premiums?

You can get tax relief on your premiums at your marginal (highest) rate of tax, up to a yearly limit of 10% of your total income. This can make premiums more affordable, but remember your benefit will be taxable if you have a successful claim.

If you are a member of a group scheme, your employer usually takes your premiums from your salary before tax and PRSI are taken off.

If you have an individual policy, your insurance company will give you a statement showing the premiums you have paid. To claim your tax relief, you include this information with your tax return.

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