Income protection insurance
Income protection insurance pays out a regular cash payment that replaces part of your lost income if you have a medium to long-term illness or disability and you can't work. It is also sometimes called ‘permanent health insurance'. It is important to know that income protection insurance does not cover redundancy.
Income protection insurance (or permanent health insurance) is not the same as private health insurance. If you are ill and need medical or hospital care, health insurance plans help pay for the cost of your treatment and hospital costs. It does not pay you any cash benefit or replace your income.
Income protection insurance pays you a cash benefit, but only if you are not able to work because of your illness. The cash is paid out as a regular income, following a deferred period, for as long as you are not able to work because of the illness. You must pay tax on the income you receive, although you may qualify for tax relief on your premiums.
Are you eligible?
You must be in full-time paid work or be self-employed to get and continue to have income protection cover. You can either:
- join a group scheme if one is available at your workplace or
- take out an individual policy of your own
It is usually cheaper to join a group scheme if one is available to you and insurance companies do not usually need as much medical information on employees in a group scheme. With an individual policy, insurance companies can look for detailed medical information.
Do you need income protection insurance?
You may need income protection if:
- you are self-employed and would have no source if income if you couldn't work due to illness or disability
- you have little or no sick pay from your employer
- you have no ill-health pension protection
- you have dependants who rely on your income
- you have no other source of income or money
Before you take out income protection, you should check if you are entitled to other benefits, which may mean you don't need this cover. These benefits could include:
- social welfare disability benefit - a weekly payment you can get from the state. It is not available if you are self-employed
- sick pay - your employer pays all or part of your wages for a time or
- an ill-health retirement pension - this lets you take early retirement with a pension if you become permanently unable to do your job. If you are a member of an employer pension scheme, you may be entitled to get this type of pension.
How does income protection work?
Most income protection policies pay out a benefit if:
- you are unable to work at your normal job because of illness or disability and
- you do not have any other job.
You get your benefit only after you have been unable to work at your normal job and are not working at any other job for a set period. This is called 'the deferred period'. When you take out your policy, you can choose what deferred period you think would suit you best, from 13 weeks, 26 weeks or 52 weeks. If you choose a deferred period of 13 weeks, which means you must be unable to work for 13 weeks before the income protection payments will begin, it will cost more, because your benefit would start sooner than if you chose 26 weeks or 52 weeks. Check if your employer pays out sick pay and if so, how much and for how long before you make a decision on the deferred period.
Some income protection policies only cover you if you become severely disabled and are not able to carry out any paid work. This type of policy provides you with very little protection and you would need to be severely and permanently disabled before you could claim any benefit. Make sure you know what sort of policy you are getting.
How much income will you get?
If you are insured through a group scheme, you get the proportion of your earnings stated in the group policy, less any other payments you get when out of work, such as sick pay or social welfare disability benefit.
If you have an individual policy, you can set the amount you want to be insured for when you take out the policy. The policy terms and conditions will tell you the maximum amount you can claim. This is usually 75% of your earnings before you became ill or disabled, less any other income you get while out of work, such as sick pay.
For example, Joe is an employee earning €40,000 a year. He has income protection insurance for €30,000 a year. The policy will pay up to a maximum of 75% of the amount he was earning before he was unable to work, less any other income or benefits he is getting.
Joe puts in a claim to his insurance company and starts to receive his payment after 26 weeks, which is the deferred period. Joe must tell his insurance company about the other benefits he is getting while he is out or work. These are:
- €750 sick pay per month from his employer
- a social welfare disability benefit of €750 per month.
What benefit will Joe get?
| 75% of annual salary of €40,000 = €30,000 | €2,500 per month |
| Less sick pay | - €750 |
| Less social welfare | - €750 |
| Maximum benefit per month | €1,000 |
So, although Joe was insured for a benefit of €2,500 per month, he can only claim €1,000 per month because of the other benefits he is getting.
If Joe was self-employed, he would not receive social welfare disability benefit or sick pay from his employer. His maximum benefit would be the same as his insured benefit - €2,500 per month.
Any actual calculation will differ depending on your individual policy, social welfare disability benefit and sick pay entitlement.
Usually your benefit payment stops as soon as one of the following happens:
- you return to work
- you reach age 55, 60 or 65, depending on the policy. This is called the ‘benefit cessation age'
- the insurer's medical officer, who may check your medical condition from time to time, decides that you are fit to return to work or
- you die.
How much does it cost?
Costs will depend mainly on :
- the amount of your cover
- the deferred period and
- the term of the policy you want.
After that, the main factors are your age, gender, health, family medical history, job and lifestyle.
Your job affects your premium because some jobs are riskier than others. Insurance companies put jobs into classes, and charge different premiums for each class. People with ‘Class 1’ jobs are considered the lowest risks and would pay the lowest premium. People in classes 2, 3 and 4 usually pay a higher premium, while people in class 5 may be refused cover as they are considered too high a risk.
| Classes of jobs | ||||
| Class 1 | Class 2 | Class 3 | Class 4 | Class 5 |
| Accountant, bank official, barrister, chemist, computer programmer | Bookmaker, hairdresser, labratory technician, caterer | Electrician, nurse, vet | Farm worker, floor layer, garage mechanic, landscape gardener, plumber | Garda, jockey, miner, prison officer, tree surgeon |
As your age also affects your premium, don’t cancel your policy to take out a new one unless you have a good reason. As you get older, income protection will cost you more and a new policy may have more exclusions, particularly if your job or state of health has changed.
Remember to pay your premiums on time. If you don’t, your policy could lapse and you would not be able to make a claim.
How much tax relief do you get on your premiums?
You can get tax relief on your premiums at your marginal (highest) rate of tax, up to a yearly limit of 10% of your total income. This can make premiums more affordable, but remember your benefit will be taxable if you have to claim.
If you are a member of a group scheme, your employer usually takes your premiums from your salary before tax and PRSI are taken off.
If you have an individual policy, your insurance company will give you a statement showing the premiums you have paid. To claim your tax relief, you include this information with your tax return.
Can the premiums increase?
Generally you can pay a guaranteed premium or a reviewable premium.
With the guaranteed premium, you pay the same amount throughout the policy. So you know in advance what your premium will be. However, you will pay a higher starting premium for this guarantee.
If you choose a reviewable premium, your provider may increase or decrease your premium or leave it unchanged throughout the term of the policy. This option will cost you less initially than the guaranteed premium option. Check with your provider how often they review the premium.
Some policies offer the option to increase the amount of cover each year in line with inflation. This is called index linking. Your level of cover could increase by about 5% each year if you choose this option. Your premiums would also increase each year. Some premiums are automatically increased each year, so check with your provider.
If your income is not likely to increase in the future, you should regularly check that your cover does not go above what you can actually claim. For example, many policies cover you for a maximum of 75% of your monthly pay, so there is no point in paying for more cover than this. Even if you had a policy that covered you for €100,000 per year, you can still only claim for a maximum of 75% of your monthly pay.
How do you make a claim?
You must fill in a claim form and send it to your insurance company. The insurance company will get medical proof from your doctor, and may also ask you to have an independent medical examination. If your claim is valid, you will get your first payment after the deferred period is over, if you are still not able to work at that time. If you have returned to work, you will not receive any benefit.
Get more information on how an insurer deals with your claim.
Could your insurer refuse your claim?
Your insurance company may refuse your claim in certain situations, for example, if a claim is caused directly or indirectly by:
- war, riot, revolution or a similar event
- you taking part in a criminal act
- drug or alcohol abuse or
- other self-inflicted causes.
These are called exclusions. It is important that you know these exclusions before you take out a policy. You would also not usually be covered if:
- you did not follow medical advice
- your disability was caused by a dangerous hobby, such as hang-gliding or parachuting
- you changed jobs and didn't tell the insurance company
- you moved abroad and didn't tell the insurance company
- you did not tell your insurance company about a pre-existing condition or you lied about your medical history
If you have an individual policy, there may also be other specific exclusions. For example, your policy might exclude claims for a back injury if you had a previous history of back pain.
The Financial Regulator’s Consumer Protection Code (pdf) requires firms to explain certain information to you before you sign up to an income protection insurance policy. They must explain:
- their meaning of disability
- the benefits available under the policy
- the reductions that may be made to the benefit payments where there are payments from other sources, such as sick pay or social welfare.
They must also tell you that your cover or any claim you make could be affected if you give incorrect or incomplete information when applying for insurance.