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’ (PHI) – but is not the same thing as private health insurance. Income protection insurance does not cover redundancy. To have income protection insurance cover you generally have to be in full-time paid work or be self-employed.

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 certain period of time. This is called ‘the deferred period’.  When you take out your policy, you can choose what deferred period you think would suit you best, typically four weeks, 13 weeks, 26 weeks or 52 weeks. If you choose a deferred period of four weeks, which means you must be unable to work for four weeks before the income protection payments begin, it will cost more than if you chose 13, 26 weeks or 52 weeks. Some policies may have no deferred period. 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.

Some income protection policies only cover you if you become severely disabled and are not able to carry out any paid work. This type of policy provides you with very little protection and you would need to be severely and permanently disabled before you could claim any benefit. Some policies may only pay out for permanent total disability, so make sure you know what sort of policy you are getting.

Do you need income protection?

You may need income protection if you:

  • Are self-employed and would have no source of income if you couldn’t work due to illness or disability
  • Have little or no sick pay from your employer
  • Have no ill-health pension protection
  • Have dependants who rely on your income
  • Have no other source of income
  • Do not have sufficient benefits to replace your lost income and/or cover your expenses

Before you take out income protection, you should check if you are entitled to other benefits, which may mean you don’t need income protection insurance:

  • 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
  • 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

How do I get cover?

You can get this cover by joining a group scheme at your workplace or taking out an individual policy.

It is usually cheaper to join a group scheme. Insurance companies do not generally 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 mainly depend on the:

  • Level of cover (usually linked to a percentage of your income)
  • Deferred period you choose
  • Term of the policy

After that, the main factors are your age, health, family medical history, job and lifestyle. 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 more and a new policy may have more exclusions, particularly if your job or state of health have changed.

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

Class 1 Class 2 Class 3 Class 4 Class 5
accountant

bank official

barrister

chemist

computer programmer

bookmaker

hairdresser

laboratory technican caterer

electrician

nurse

vet

farm worker

floor layer

garage mechanic

landscape gardener

plumber

Garda

jockey

miner

prison officer

tree surgeon

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. These payments may include 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. There will usually be a maximum amount you can insure. The policy terms and conditions will tell you the maximum amount you can claim. This is usually 66% or 75% of your earnings before you became ill or disabled, less any other income you get while out of work, such as sick pay, and single person’s social welfare illness benefit if you are entitled to it.

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 gets.

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 gets while out of work. These are:

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

 

What benefit will Joe get?

75% of annual salary of €40,000 = €30,000 €2,500 per month
Less sick pay – €750
Less social welfare – €750
Maximum benefit per month €1,000

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 gets.

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.

How long does your benefit last?

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
  • you pass away

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 make a claim.

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

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

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