Income Protection is one of the best-kept secrets in terms of financial planning. Many people are unaware that a product exists that will provide you with an income if you are unable to work due to an accident or illness. Not only that, it's fully tax-deductible. Just like a pension, you may claim tax relief on your income protection contributions at your marginal rate.
In simple terms, income protection is a way of making sure you and your family have a financial cushion if you need it.
How long could you cope financially if you were on sick leave?
If you are self‑employed, you will have to rely on any investments and savings you might have. There is no State Illness Benefit available to self‑employed workers.
If you are employed, your employer might have sick leave benefits that will automatically cover you when you’re off sick. But these are usually only available up to a certain time limit – do you know how long these benefits would last with your employer?
Once your employer sick pay ends, you would have to rely on the State Illness Benefit, currently up to €208* per week for eligible employees, and on any investments and savings you might have.
*The State Illness Benefit is administered by the Department of Employment Affairs and Social Protection and is subject to qualifying conditions. For more information visit welfare.ie
Income Protection: Cover to suit you
You can cover up to 75% of your earnings, less the personal rate of State Illness Benefit entitlement or continuing income from other insurance policies. Your cover can be a maximum of €262,500 per annum.
How long your cover should last
When taking out your policy, you choose the expiry age that best suits your circumstances. This is when your cover will end and you can select any age between 55 and 70.
When you want your replacement income to start?
There is an amount of time you have to be off work continuously, due to illness or injury, before your income protection benefit starts being paid. This is called the Deferred Period. You can choose a Deferred Period of 4, 8, 13, 26 or 52 weeks. For additional flexibility, you can also choose to have two Deferred Periods within your policy.
Indexation to help protect your cover from the effects of inflation
By adding Indexation to your policy, your cover increases by 3% each year, in return for a 3.5% increase in your premiums each year.
Escalation in Claim to help preserve the value of your benefit payments
You can also opt to include the Escalation in Claim option. If you choose to add this to your policy and in the future you make a claim, your benefit amount will increase by 3% each year.
Cover Your Mortgage and Pension Contributions
Income Protection insurance can be used to protect your pension by maintaining your contributions right up until your selected retirement age. In addition, you may include mortgage protection to ensure that you continue to repay your mortgage even if you are unable to generate an income as a result of an accident or illness.
Additional features
Hospital Cash Benefit
If you are admitted to hospital during the Deferred Period, a benefit is payable for every day you spend in hospital after day 7, up to a maximum of 90 days per claim. A limit of 365 days in total applies to the policy.
Proportionate Payment
This is a partial benefit payment that may be payable to you if, following a claim, you return to work on reduced earnings. For example, if you are only able to return to work on a part-time basis, or you have to find an alternative occupation with a lower income as a result of your illness or injury.
Back to Work Benefit
This benefit provides financial support for the first three months after you return to full‑time work following a claim of more than one year. If eligible, you will get 75% of your monthly Income Protection benefit for your first month back in work, 50% in month 2, and 25% in month 3.
Linked Claims Benefit:
If you return to work following a claim but need to claim again within 6 months, due to the same reason the original claim was based on, the Deferred Period(s) will not be reapplied.
Essential Activities Benefit
If you become unemployed, take a career break or parental leave, we will consider you for a lower level of cover to a maximum of €15,000 a year. The benefit becomes payable if you are unable to carry out certain personal activities, e.g. walking, as defined in the policy conditions.
Guaranteed Insurability Option
This allows you to increase your cover by up to 20% of the original amount every three years, subject to certain conditions.
Continuation Option
If you change jobs, your new employer may apply to us to replace your Personal Income Protection policy with a new Executive Income Protection policy offering identical benefits. By using the Continuation Option, you won’t have to provide new medical evidence when the new policy is applied for.
Waiver of premiums
While you are in receipt of an Income Protection benefit, you do not have to pay the premium for that benefit.
Own Occupation Cover
Your claim will be assessed based on your ability to carry out your normal occupation. In addition, if you change job, your Income Protection will continue to protect you, regardless of your new occupation.
Terminal Illness Cover
If you claim due to a terminal illness and have been diagnosed with less than 12 months to live, your Income Protection benefit payments will start immediately.
Tax Relief
The premiums you pay may be eligible for tax relief*. Currently, this can reduce the cost of your cover by up to 40%, if you pay income tax at the higher rate. The gross premium is payable to the product provider and you must claim the tax relief from Revenue. Your Income Protection benefit is then taxed the same way as your normal income. So income tax, PRSI and the Universal Social Charge will be deducted from your Income Protection benefit and you will be paid the net amount.
*Tax relief is available on your premiums at your marginal (highest) rate of tax, up to a yearly limit of 10% of your total income. 40% is the rate currently applicable to higher rate taxpayers. Examples are based on current rates of taxation. The gross premium is payable to the provider and the tax relief must be claimed from Revenue.
Tax relief is available on your premiums at your marginal (highest) rate of tax, up to a yearly limit of 10% of your total income. 40% is the rate currently applicable to higher rate taxpayers. Examples are based on current rates of taxation. The gross premium is payable to the product provider and the tax relief must be claimed from Revenue. Revenue limits, terms and conditions apply.
The information contained here is based on Forsythe Financial Planning's understanding of current Revenue practice as at January 2022 and may change in the future.
creating your own income protection plan
