New Year, new you! The old adage that lights a fire under us every January bringing with it promises of new fitness regimes, promises of a new work-life balance and promises of ‘I’ll be better with my money this year, I’ll save more, I’ll start that pension’. What this January has brought is another lockdown and stresses of working from home, bad weather and home schooling. Yet it has also given us time, time to reflect on what are the important things. And one of the most important things in life is our income as it allows us to do all the other things that are important to us.
So why are we so reluctant to insure it? We pay for car insurance, health insurance, home insurance and even pet and gadget insurance but we baulk when we talk about insuring the one thing that pays for all of them; our income.
Here are some of the reasons I have heard over the years when discussing income protection with clients:
- My employer will “look after” me – so here’s the thing; you are not legally entitled to even one paid sick day a year in Ireland so unless it’s written in your contract, do you want to take that risk? And if it is how long will they pay you for and will it be at full pay, half pay?
- I have savings that I can use – the scary thing is that according to Irish Life the average length for an income protection claim is 4 years. Aviva’s experience is 5 years for the average claim. The CSO has calculated the average earnings in Ireland now stand at close to €41,500 (Q3, 2020) so you can do the maths on how much of an accessible float you would need to financially survive the average claim period.
- I’m young, fit and healthy; I don’t need it – In 2019 of the 3,306 people who received payment from an income protection policy with Irish Life the average age was 47 and according to New Ireland the top three reasons for claiming are orthopaedic/musculoskeletal which accounts for 29% of claims, anxiety/stress/psychological account for 28% and cancer accounting for 22% of all claims. Interestingly, the main insurers all record that women represent more claims than men.
- It’s too expensive – and here comes the good news, premiums paid to an income protection scheme qualify for tax relief up to 40% to a maximum of 10% of your salary.For example, to replace €50,000 of income for a 42 year old, non-smoking, professional, starting after being out of work for 13 weeks and continuing until 65 (because yes you could claim at 47 and not be able to work again until retirement and it would continue to pay you) would cost €192.50 per month but after tax relief the premium would be €115.50 per month. Isn’t it worth it to pay €1,386 per year to ensure your family doesn’t struggle if you are unable to work? Put another way the cost is 2.7% of the benefit you could potentially receive from it? Even better if you are a company owner/director as the company can pay the cost for you and it is a deductible expense for them.
I am of the opinion that one of the limiting factors for individual’s when thinking about income protection is the notion that we have to cover their entire salary. The maximum cover you can put in place is 75% of earnings less the state illness benefit. However, for someone earning €80,000 a year does that mean that you need to have a replacement income of €49,704?
An honest assessment of the essential’s (rent or mortgage, food, utility bills, loan repayments) versus the luxury items (holidays, my new coffee machine that keeps me going) can yield a lower number making it even more affordable. You should also factor in savings, rainy day funds and any liquid investments that may be used as income.
Who needs income protection?
The simple answer is everyone.
It is essential for all self-employed individuals. It is essential for small business owners who are the main drivers of their business. It is essential for anyone with financial dependants. Even if you have no financial dependants, how are you going to pay the mortgage or rent if you can’t work due to illness? It’s bad enough being ill in the first place than adding financial stress on top of it.
Even if you are lucky enough to be covered for income protection through your employer you may wish to top it up to the maximum. You may be covered for 50% of your salary by your employer, you can take out another policy for 25% of your salary to bring you up to the 75% maximum.
How can I learn more?
Income protection is a vital part of protecting ourselves and our loved ones. It can be complicated and difficult to figure out. In Maven Financial Planning, we aim to cut through the jargon and match the best policy to our clients needs. You can contact us today on 091-769566 or reception@mavenfinancial.ie to arrange a video call or chat with one of our advisors to discuss your particular financial requirements.
Jargon Buster
- Re-viewable rates – means the premium is reviewed every few years and adjusted for age etc. This means it is cheaper at the start and more expensive as time goes on.
- Guaranteed Rates – means the premium stays the same throughout the term of the policy unless you alter the benefits.
- Indexation – means the amount covered and the premium increase annually, generally added to protect against inflation and salary increases
- Deferred Period – this is the length of time someone must be unable to work before a claim can be made. This can be 4, 8, 13, 26 or 52 weeks.
- Normal Retirement Age – this is the age at which the policy will cease both in terms of cover but also in terms of being the age that payment would stop in the event of a long term claim. Usually pension benefits become the main source of income at that point in time. Some companies will only go as far as 65 while others will insure up to 70 so be careful here.
- Escalation (Benefit increasing) in payment – this means that in the event of a claim that the amount being paid would increase annually. This is designed to protect against inflation in the event of a claim.
- Benefit Level in payment – this means that even if there is a long term claim that the amount paid does not increase yearly.
- Occupation Class type – 1 is generally office based occupations, class 2 involves occasional manual labour including anything from agricultural advisors to dentist to sound engineers. Class 3 would be skilled non-manual and manual occupations such as aircraft technicians, school teachers and nurses. Occupation class 4 is generally for heavy manual or high risk occupations such as heating & plumbing specialists and mechanics.
