The Importance of Protecting your Income

Your income is your most important asset.  Your lifestyle is determined by your income. If illness would mean that you couldn’t pay the bills and support your family, you need to consider an alternative.

Your income helps you provide for your:

  • Mortgage
  • Utility Bills
  • Children’s Education
  • Car
  • Hobbies
  • Insurance
  • Savings

So, how can you protect your Income?

Income Protection cover can provide you with up to 75% of your normal income, less any social welfare payments, when you’re off work due to illness or injury. It can help cover your normal, regular outgoings whilst also trying to ensure minimal lifestyle changes for you, your family and your business. Put simply, it is there to protect your income during your working life.

The cost of cover is determined by your age, occupation, the deferred period and health status. If you are absent from work due to illness or injury, your chosen insurance company will provide you with a replacement income until you return to work, or until your chosen retirement date if you’re not fit to return to work before then.

Many of our clients have accumulated savings and may look to that nest egg in a time of need. As prudent and sensible as savings are, by spending €3,000 per month to cover the out-goings mentioned previously, a lump sum saving of €36,000 would be eroded within only 12 months. You would be surprised at how quickly your lifelong savings can be reduced in such a short space of time.

We always encourage our clients to consider the practical, day-to-day effects of not being able to work. You might ask yourself:

  • What would happen if my income suddenly stopped because of ill health?
  • Who will pay the mortgage, bills and continue the children’s savings plan?
  • How long would my employer pay me if I were on prolonged sick leave?

These are undoubtedly hard questions to ask and uncomfortable questions to answer, but without savings, you will need some other way to keep paying the bills – that’s where income protection comes in. Let’s call it Plan B.

Are you Self-Employed?

You’re most likely to need income protection if you’re self-employed as you don’t have an employer to fall back on. Also, the self-employed are not entitled to the State Illness Benefit if they are unable to work due to illness. It is therefore vitally important that you consider protecting your income, as no-one else will do it for you.

Are you an Employee?

Employees should check with their employer to see what income, if any, they provide if you are unable to work. If there is a HR department within the company, you can ask them to see what type of cover is in-place. You may be covered for a specific period of time (for example, 6 or 12 months), however from our experience what employees will receive will vary greatly between employers. It is definitely worth checking out the terms of your employment contract to see if you are covered at all.

Do I get tax relief on my premiums?

 Yes, Income Protection is the only type of Insurance on which the Government will give you tax relief at your marginal rate, this in itself tells you just how important this type of cover is. In effect, you can now use your tax bill to start paying for some of your Insurance costs.

How does the tax relief actually work?

For example, let’s look at John, a 40-year-old non-smoker, accountant, earning €60,000 per annum. He has chosen to protect 50% of his salary (€30,000 p.a.) until his retirement at 65. He selects a 6-month deferred period and chooses guaranteed, increasing premiums. Based upon current rates, John’s gross premium would be €80.00 per month, yet it only costs him €47.20 per month after tax relief at 41%.

What type of illnesses or injuries would keep me from working?

Examples of some typical claims include:

  • Orthopedic conditions i.e. back injury
  • Psychiatric conditions i.e. stress and depression
  • Cardiac – i.e. heart issues
  • Cancer

Income protection should not be confused with critical illness cover, which pays a once-off lump sum if you have a specified serious illness. I will cover the issues surrounding critical illness cover in a future ‘Finance Matters’ column.

In summary, I recommend that all my clients sit down and consider what would happen if the bread-winner was to be out of work through illness for a period of time. Then calculate how long your savings would last. If they don’t last for long or you would rather not spend your nest-egg, you might want to consider protecting your most important asset – your income. You might need to consider Plan B.

Gerard O’Brien LL.B LL.M CFP®QFA is the Owner of Heritage Wealth, a Financial Planning practice based in Main Street, Midleton, Cork. www.heritagewealth.ie