We've all heard of income protection but is it something we need to pay for or is it a luxury for when there's extra cash on the table? CCPC help us work it out.
The prospect of becoming ill at some point in the future and being unable to work is extremely daunting. But life can be unpredictable and often throws curve balls in our direction.
If you’re thinking about how you would cope financially if you couldn’t work because of illness or injury, you might be considering options like income protection insurance. The Competition and Consumer Protection Commission (CCPC) has some useful tips on what to consider if you’re thinking about taking out an income protection policy.
What is income protection insurance?
Income protection insurance - sometimes called permanent health insurance - is a protection policy offered by life insurance companies. An income protection policy will pay you a benefit income if you have been unable to work for a certain amount of time because of illness or injury.
There are a couple of things to be aware of before you take out a policy. Firstly, a policy won’t pay you a benefit straight away. You will need to be out of work for weeks, or months, before the policy pays out.
The second thing to be aware of is that your policy benefit will be less than your actual income, so you will still have less income than you would if you were working.
Is income protection for you?
If you are working full-time or are self-employed and you become unable to work, income protection insurance might be something you wish to consider, especially if you have other people depending on your income. You might not be entitled to sick pay in work, or the benefits you are eligible for may fall short of your salary. Before you take out income protection insurance you should check what you are entitled to with your employer, to see if it covers you and/or your dependents.
Different cover options
You may have choices when it comes to income protection insurance – you can join a group scheme, if one is available in your workplace, or you can take out an individual policy. Generally you will find it cheaper to join a group scheme, and the amount of medical information required for group protection policies is significantly less than for single policies. On the other hand, an individual policy will be tailored towards your specific needs.
How much of your income is protected
Individual income protection policies typically set out a maximum benefit that will be paid out to you if you make a claim. The maximum benefit payable is generally limited to a certain percentage of your total earnings, for example 66% or 75%. Any social welfare benefits that you receive will be deducted from this amount.
For example, if you earn €600 per week, the maximum benefit payable could be 75% of your total earnings. Your policy would pay out €450, less any social welfare payments.
Under group income protection schemes, you get the proportion of earnings set out in the group policy, less any social welfare payments that you receive. You should always check the terms and conditions of your policy to see what you are being offered and what your pay-out is likely to be.
Understanding your deferred period
It is important to understand the deferred period. In a nutshell, your deferred period is the amount of time you need to be out of work due to illness or injury before your policy will start paying you a benefit.
When you take out your policy, you may be able to choose the deferred period for your policy, typically 4 weeks, 13 weeks, 26 weeks or 52 weeks. The longer your deferred period, the cheaper the cost of your cover. If you choose a deferred period of 4 weeks, which means you must be unable to work for 4 weeks before the income protection payments will begin, the policy will cost more than if you chose 13, 26 or 52 weeks. 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.
Cost of cover
The cost of your cover is broadly linked to three factors – 1) the amount of cover, i.e. the percentage of your income protected 2) your deferred period and 3) the length of your policy. Other factors that can impact the cost of cover is your age, health, occupation, medical history and lifestyle.
How long will benefits last?
Your income protection payments will stop if you return to work, reach an agreed age as set out under your policy or you die. Your insurance company’s medical officer might check your condition, and may deem you fit to return to work, at which point your payments will come to an end. Remember to pay your premiums on time. If you don’t your policy could lapse, and you may not be able to claim.
To get more information on income protection insurance, check out the CCPC’s consumer website.