Income protection or Permanent Health Insurance (PHI) is a vital financial product designed to provide a safety net if you become unable to work due to illness or injury.
In Ireland, where many individuals rely on their income to meet daily living expenses, mortgage repayments, and other financial commitments - in particular familie - understanding the advantages and disadvantages of income protection is essential.
Here John Lowe of MoneyDoctors.ie gives a comprehensive overview of the pros and cons to help you make an informed decision.
Pros of taking out income protection in Ireland
1. Financial security during illness or injury
The primary benefit of income protection is that it offers a steady income if you're unable to work due to illness or injury. This ensures that your essential expenses—such as mortgage payments, utility bills, groceries, and childcare—are covered, reducing financial stress during difficult times.
2. Replaces a significant portion of your income
Typically, income protection policies pay out around 60-75% of your gross income, less any social welfare entitlements, until your incapacitation ends or your pension kicks in. This level of cover helps maintain your standard of living and prevents financial hardship, especially if your illness or injury is prolonged.
3. Peace of mind
Knowing you have a safety net in place can alleviate anxiety about unexpected health issues. It allows you to focus on recovery rather than financial worries, which can be beneficial for both mental and physical health.
4. Customisable cover options
Many providers in Ireland offer flexible policies that can be tailored to your specific needs. You can select the level of benefit, waiting periods before payouts begin (from one day to six months – the norm being six months), and the length of the benefit period, ensuring the policy aligns with your financial situation.
5. Protection for your family
Income protection can also safeguard your family’s financial future by ensuring that household bills and expenses are covered, even if you are temporarily unable to generate income.
6. Potential tax benefits
In most cases, premiums for income protection are tax-deductible at your marginal rate, providing some financial relief in terms of tax planning. Getting a refund of 40% every month of your premium eases the cost burden.
Cons of taking out income protection in Ireland
1. Cost of premiums
Income protection policies can be expensive, especially for younger individuals or those with pre-existing health conditions. Premiums vary based on age, occupation, health status, and the level of cover chosen, which can make it a significant ongoing expense.
2. Not always fully covering your income
Most policies pay out a percentage of your income rather than the full amount – up to 75% of your annual income, less any social welfare benefits. This might still leave gaps if your expenses exceed the benefit received, especially for high earners or those with substantial financial commitments.
3. Waiting periods and policy exclusions
Policies usually have a waiting period—often one day or four, eight, or 13 weeks—before benefits commence. During this time, you won’t receive payments, which could be challenging if your savings are limited. Additionally, certain illnesses or injuries may be excluded from coverage, reducing the policy’s effectiveness.
4. Potential for policy complexity
Income protection policies can involve complex terms and conditions. Understanding the fine print—such as definitions of disability, benefit periods, and exclusions—is crucial to ensure the policy provides the coverage you expect.
5. No guarantee of claim approval
Claims are subject to assessment, and not all claims are approved. Factors such as the nature of the illness, compliance with policy terms, and medical evidence can influence the outcome.
6. Alternative options may be adequate for some
If you have substantial savings or other income sources, such as a spouse’s income or government support, you might consider whether income protection is a necessary expense. In some cases, self-insuring or relying on savings may be more cost-effective.
Income protection in Ireland offers significant advantages, particularly in providing financial stability during periods of illness or injury. It is the only policy outside of life cover within a pension that attracts tax relief at your marginal rate. It can give peace of mind, protect your family, and help maintain your lifestyle. However, it also comes with costs, potential limitations, and complexities that require careful consideration.
Before purchasing an income protection policy, evaluate your financial situation, existing savings, and risk exposure. Comparing different policies, understanding their terms, and consulting with financial advisers can help you select the most appropriate cover. Ultimately, while income protection is not a necessity for everyone, for many Irish workers, it can be a valuable component of a comprehensive financial plan.
If you need assistance in choosing a policy or understanding specific terms, consider speaking with a financial adviser familiar with Irish insurance products or email me directly.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.
For more information, click on John Lowe's profile above or on his website.
