Income Protection Insurance: A Complete Guide

Have you ever wondered what would happen if you suddenly could not work due to illness or injury? How would you pay your bills and support your family? Income Protection Insurance can provide for both you and your family. It's a tax efficient financial safety net that can provide peace of mind and security when you need it most.

In this comprehensive guide, we'll explore everything you need to know about income protection insurance, from how it works to choosing the right policy for your needs. Let's get started!

How Does Income Protection Work?

Income protection insurance is designed to provide financial support if you're unable to work due to illness or injury. Here's a breakdown of how it typically works:

You choose a policy that covers a percentage of your income (the maximum cover available is 75% of your total pre-tax earnings inclusive of any state illness benefit you may be in receipt of).
If you become ill or injured and can't work, you file a claim with your insurance provider.
After your chosen waiting period has lapsed (also known as the deferred period), the policy starts paying out the weekly benefit you insured.
You continue to receive payments until you can return to work, reach the end of your policy term which is normally your retirement age, or you pass away.
Most insurers also offer a proportional benefit if you return to work initially part time or on reduced hours.
You don’t have to pay any premiums while your income protection benefit is being paid to you under a claim.

One of the great things about income protection is that you can make multiple claims, even for the same illness was to reoccur. There is limit on how many times you can make a claim. Additionally if you have a recurrence of the same illness after you return to work you can claim again without needing to wait on your deferred period to lapse again. This varies depending on the provider.

You choose a policy that covers a percentage of your income (the maximum cover available is 75% of your total pre-tax earnings inclusive of any state illness benefit you may be in receipt of).
If you become ill or injured and can't work, you file a claim with your insurance provider.
After your chosen waiting period has lapsed (also known as the deferred period), the policy starts paying out the weekly benefit you insured.
You continue to receive payments until you can return to work, reach the end of your policy term which is normally your retirement age, or you pass away.
Most insurers also offer a proportional benefit if you return to work initially part time or on reduced hours.
You don’t have to pay any premiums while your income protection benefit is being paid to you under a claim.

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how Does income protection work

Will I receive tax relief on my income protection premium?

Yes, if you are a PAYE worker you can claim tax relief on your full income protection premium. Your tax relief will be at your marginal rate of tax. This will either be 20% or 40% tax relief depending your income and the marginal tax rate you pay.

tax relief

Choosing the Right Income Protection

Waiting/Deferred Period

The waiting period, or deferred period, is the time between when you stop working and when your policy starts paying out. Choosing the right waiting period is crucial for balancing coverage and affordability. Here are some factors to consider:

Employer Sick Pay

If your employer offers sick pay, you might want to align your waiting period with the duration of this benefit. This way, you can seamlessly transition from your employer sick to your income protection payout.

Personal Savings

Consider how long you could comfortably rely on your savings. The longer you can support yourself, the longer waiting period you can choose, which can lead to lower a premium.

Common Waiting Period Options

Most people opt for waiting periods of 4 to 52 weeks as the longer the waiting period, the cheaper your policy will be. However, we suggest you always compare quotes for different periods, as sometimes the savings between longer waiting times (like 26 weeks vs. 52 weeks) might be minimal.

The available waiting periods depending on the insurer are 4,8,13,26 and 52 weeks. The longer the waiting period the lower the premium will be. For example, a client who’s employer has six months sick pay at work would normally choose a 26 week waiting period.

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Choosing the Right Income Protection

Determining Your Income Protection Payout Amount

Choosing the right payout amount of cover is critical to ensure you have adequate coverage without overpaying for unnecessary benefits. Here's how to approach it:

Maximum Coverage Limits

All insurers cap coverage at 75% of your pre-tax earnings inclusive of any state illness benefit you may be receiving. This limit is set to provide a financial incentive for you to return to work when you are able to return.

Calculating Your Needed Coverage

To determine how much coverage you need:

List your essential monthly expenses (mortgage/rent, utilities, food, etc.)
Add any additional costs you'd want covered (savings, investments, etc.)
Subtract any other income sources (partner's income, rental income, etc.)
The resulting figure is a good starting point for your coverage amount.

Balancing Coverage and Premiums

While it's tempting to opt for the 75% maximum coverage, remember that higher coverage means higher premiums. Strike a balance between adequate protection and affordable premiums.

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Determining Your Income Protection Payout Amount

Finding the Best and Cheapest Income Protection Insurance

Getting the right income protection policy at the best price requires some research and comparison. Here are some tips to help you find the best deal:

Factors Affecting Policy Costs

Your age.
Health history.
Occupation.
Lifestyle (e.g., smoking status & hazardous activities).
Insured benefits.
Waiting/Deferred period.
Policy term.

Tips for Comparing Policies

Get quotes from multiple providers.
Compare coverage details, not just prices.
Check for any exclusions or limitations.
Check any additional free benefits which mat be offer by insurers.
Consider using an independent financial broker.

Online Resources for Quotes and Comparisons

Many websites offer comparison tools for income protection policies. These can be a great starting point, but always verify the information directly with the insurer or your broker before making a decision.

Reading Policy Details

Don't skip the fine print! Understanding the exact terms and conditions of your policy is crucial. Pay special attention to:

Definition of inability to work.
Exclusions and limitations.
Claim process.
Policy terms & conditions

If your premium is a reviewable premium (Aviva only) or a guaranteed premium.

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Income Protection for Self-Employed Individuals

If you are self-employed, income protection insurance is particularly important as you don't have the safety net of employer-provided sick pay or possibly no entitlement to state illness benefit. The premium a self employed individual is paying can be off set against their annual personal tax liability to Revenue

Here are some key considerations:

Choose a policy that covers your specific occupation.
Consider a longer waiting period to reduce premiums if you have savings.
Establish if you have any entitlement to state illness benefit.
Review different levels of cover and deferred periods to find a suitable premium.
Research all providers because premiums for our occupation may vary across providers.

Income Protection for Self-Employed Individuals

What is Executive Income Protection

If you are a self-employed company director your limited company can insure your income at no personal cost to you under an executive income protection policy. Also if you key employer under an executive income protection policy your employer can also insure your income at no cost to you.

Here are some of the benefits of executive income protection:

Company directors have no BIK liability if their limited company insurers their income
Premiums can be offset by a limited company as a regular expense to the business
Company directors may also be able to insure any Pension contributions their business may be making on their behalf.
Key employees also have no BIK liability if their employer insurer their income under an executive income protection policy.

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What is Executive Income Protection

Income Protection vs Critical Illness Cover

While both offer financial protection, these policies work differently:

Income Protection

Pays out a regular income if you are unable to work due to illness. Injury or disability.
Covers inability to work due to illness or injury
Payments continue until you can return to work, the policy reaches its cessation date or you return to work.
Tax relief is available on your premium.

Critical Illness Cover

Pays out a once off tax free insured lump sum and the policy ends.
Covers specific serious illnesses as defined in the policy conditions, these conditions vary across insurers.
Pays out once, regardless of whether you can return to work.
There is no tax relief on the premium.

Some people choose to have both types of insurance for comprehensive protection.

Income protection insurance is a valuable tool for safeguarding your financial future. By understanding how it works and carefully considering your needs, you can choose a policy that provides peace of mind without breaking the bank. Remember to review your coverage regularly and adjust it as your circumstances change.

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Income Protection vs Critical Illness Cover

Income Protection Insurance FAQ

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Is income protection insurance worth it?

For many people, income protection insurance is definitely worth considering. It provides financial security if you're unable to work due to illness, injury or disability. However, its value depends on your individual circumstances, including your savings, other insurance coverage, and job security.

Can I have multiple income protection policies?

Yes, you can have multiple income protection policies. However, the total amount you can claim is typically capped at around 75% of your pre-tax income. Having multiple policies can provide additional security, but it's important to ensure you're not over-insured and paying for unnecessary coverage.

Who are the providers of income protection in Ireland?

Aviva, Zurich, New Ireland, Royal London and Irish Life.

Can I Claim tax relief on my income protection premiums?

Yes you can claim tax relief at your marginal rate of tax which will be either 20% or 40% tax relief.

Does income protection cover mental health issues?

All income protection policies do cover mental health issues, but coverage can vary between insurers. Always check the policy details carefully. Some policies may have limitations or exclusions for pre-existing mental health conditions.

Can I get income protection if I have a pre-existing condition?

Yes, it's often possible to get income protection insurance with a pre-existing condition. However, the insurer may exclude claims related to that condition at the policy start date, charge higher premiums, or impose a waiting period before covering the condition. It's crucial to be honest about your medical history when applying for a policy.

How is income protection different from unemployment insurance?

Income protection insurance covers you if you're unable to work due to illness, injury or disability. Unemployment insurance, on the other hand, provides benefits if you lose your job involuntarily, such as through redundancy. Income protection doesn't cover unemployment unless it's due to illness, injury or disability.

What medical information will I be asked when applying for Income Protection?

You will be asked questions about your occupation, your lifestyle (e.g., hobbies, smoking status, and alcohol consumption), your medical history, such as whether you have been hospitalised or had any medical investigations recently, your family’s medical history before the age of 60, doctor’s contact details.

Is personal income tax payable on an Income Protection Insurance benefit?

Income Protection policies provide you with a replacement source of income, therefore it is still subject to the normal tax regime that applies to you. The insurer will deduct any tax, prsi and usc due in the same way your employer would.

What if I change jobs or occupation will my premiums change?

Your policy will continue to provide cover if you change jobs, regardless of what the new job entails.

Do I still pay the premiums if I am receiving the benefit?

Typically, you do not have to continue paying the premiums while you are receiving payment of the benefit. However, once you are finished your claim, you must recommence payment of the premiums to maintain the cover.

How does indexation/inflation protection work on Income Protection?

With most insurers on the first anniversary on your policy and every year thereafter your insured income protection benefit will increase by 3% and your premium by 3.5%. Some insurers use a CPI calculation instead. If you choose indexation from the outset it can be removed at any point but not reinstated unless you reapply for cover.

How long will my Income Protection benefit be paid if I am out of work?

Your Income protection plan will pay you a regular income until you are able to go back to work or until your policy ends (usually on the day that you retire).

Income Protection Insurance FAQ