Salary Protection/ Income Protection
What is it?
The purpose of Salary Protection or Income Protection Insurance is to provide a regular income if you are unable to work due to illness or injury. You must be totally unable to perform the essential duties of your normal occupation. Income Protection Insurance is designed solely to provide protection benefits and at the time of a claim, your earnings must be at the level that justifies the amount of cover you have chosen. Payments continue either until you are well enough to return to work or when your policy ends. Your income is one of your most important assets, yet many do not insure it. An Income Protection policy can help to protect your lifestyle by limiting the financial consequences of suffering an illness or injury which prevents you from working. The stark reality is that 1 in 8 people will suffer a serious illness and 1 in 6 will be off work for 6 months or more before the age of 65.
How much cover do I need?
The maximum amount of cover that you can put in place is 75% of your current earnings, less state social welfare benefits, which is currently €208.00 per week. For example, Michael earns €120,000 a year. His employer does not provide any sick pay, but Michael is eligible for the State Illness Benefit, currently up to €208 a week. The maximum cover amount he can put in place is 75% of his income – €90,000 – less his state benefit of €10,816 which is €79,184. That said, if cost is an issue, you don’t have to cover the full amount; some level of cover is a lot better than no cover. Regarding the State Benefit it is important to remember that even if you are entitled to it, it is only paid for two years. Moreover, if you are self-employed you are not entitled to this benefit.
Tax on Benefits
Under current legislation, the benefit payments will be treated as income and so are assessed for income tax, PRSI and the Universal Social Charge (USC). The product provider will deduct any income tax, PRSI and USC at source in the same way as an employer would take them from a normal income, before providing the benefit to you.
Tax Relief on Income Protection premiums
Under current tax law the premiums you pay are eligible for Tax Relief. This can reduce the cost of your cover by up to 40%, if you pay income tax at the higher rate. The maximum amount on which tax relief can be claimed is limited to 10% of your total income for the year of assessment. For example, a 36-year-old female, non-smoker with an annual Salary protection benefit of €34,000 and a Deferred Period of 26 weeks would pay a gross premium of €66.08 per month. However, the premium NET of tax relief at 40% would be €39.68 per month. Tax relief can be claimed on your annual tax return or, alternatively, a better option might be to log into MyAccount.ie and claim the tax relief from there.
At what age does the cover or benefit cease?
At the outset you can choose the expiry age that best suits your circumstances. This can be any age between 55 and 70. Many people will choose an expiry age to coincide with their retirement age. And, as the age of retirement is increasing, all Income Protection providers offer an expiry age up to 70.
This is the period you need to be continuously out of work, due to accident or illness before your benefit starts being paid. You can choose a Deferred Period of 4, 8, 13, 26 or 52 weeks, but bear in mind, the shorter the Deferred Period, the higher the premium. Very often, the Deferred Period is determined by your employer’s sick pay rules. In other words, as soon as your sick pay ends (or reduces), your Income Protection benefit would start.
For additional flexibility, you can choose two Deferred Periods within your policy. So, for example, you could choose to provide a certain amount of Income Protection benefit after a shorter Deferred Period and a higher Income Protection benefit amount after a longer Deferred Period. For example, Jane is employed and pays PRSI. She has selected one Deferred Period of 26 weeks on her Income Protection policy. Mary chose this amount of time because it coincided with when her employer sick pay would end. On the other hand, Jane receives a cancer diagnosis, and her employer pays her full pay for three months and half pay for a further three months. When setting up her policy, she chose two Deferred periods to dovetail with her employer’s sick pay rules: a reduced Income Protection benefit after thirteen weeks (when she is receiving reduced pay) and then the full benefit after twenty-six weeks when her sick pay comes to an end.
All that said, the chosen Deferred Period is often driven by cost where as noted, the longer the Deferred Period, the lower your monthly premium.
Increasing your benefits
It is important to keep your benefits under review and to increase them in line with increased earnings. All Income Protection providers offer a Guaranteed Insurability Option whereby you can increase your cover by 20% of the original amount protected every three years, or when you receive a salary increase, without medical evidence. This means that you can increase your benefits even if you have developed some health issues. The maximum total increase over the policy is 100% of the original cover.
Escalation in Claim Option
If you opt for this, each year that you are in receipt of the Income Benefit, the benefit will increase by 3%.
Impact of Inflation on your Salary Protection Benefit
Inflation, as we are all now realising, impacts the general cost of living, as it means the price of goods and services increases over time. You can add Indexation to your policy, and your benefit will increase by 3% each year, in return for a 3.5% increase in your premiums each year.
If you have more than one occupation, your Income Protection cover is based on your main occupation – usually defined as spending at least 21 hours per week engaged in that occupation.
Change of Occupation
If you change your occupation after the policy has commenced, you do not have to inform the insurer.
Proof of Age
In the event of a claim, you will be required to provide evidence of proof of age
Hospital Cash Benefit
If you are hospitalised during the Deferred Period – usually for a continuous period of 3 to 7 days – a daily benefit of 1/365 of the Income Benefit is paid continuing for a maximum of 90 days.