When Money Doesn’t Grow on Trees
Laura Reidy
Head of Pensions and Wealth Management

Little did I think a recent shopping trip to a well-known toy shop with my 5-year-old would provide inspiration for this article on income protection! Having been asked repeatedly for a skateboard my anxiety levels were well and truly at peak levels. As I tried to escape the thoughts of broken bones and concussion, we negotiated that my daughter could get a skateboard when she was 12 (still no). On the next aisle there again started a new chorus of ‘can I haves?’ and in effort to shut it all down, I told her that money didn’t grow on trees. Completely bewildered by what I had said, she looked back at me and what then commenced was a rapid fire round of questions on how money is made and where it comes from!

This got me thinking about the concept of a money tree. So, what if you owned a money tree, and day in and day out it sprouted money. Just imagine how you would nurture and protect it. You might even safeguard it by putting a gate on your property, an electric fence (too much?!). Would you insure it? You are now living off your beautiful money tree, in fact it might be your only source of income but imagine one day it just stopped producing the fifties. What if your money tree never gets better? If you are working and earning an income, you are your own money tree!

So, have you put in place protection for your earnings that if in the event of illness, injury or disability you could not work? If not, why, because if you did have a money tree you would have protections in place, right?!

So what is income protection?
Income protection gives you money each month until you can work again. While you are healthy, you pay a premium every month, or each year if you prefer. If you are unfortunate to fall ill or become injured and are unable to work during the term of your plan, you can then make a claim and receive a monthly income until you are well again. For example, if back pain means you can’t work, or if you are unable to work due to mental health issues, if a car accident puts you in hospital, or if you are diagnosed with cancer and need time out for treatment – income protection will help support you until you can work again. In simple terms, it gives you an alternative income while you are unable to work.

How much can you insure?
You can cover up to 75% of your earnings (excluding Benefit in Kind) less State Illness Benefit. Cover is up to a maximum of 75% because there must be some incentive to return to work.

How long do you want for it to kick in?
Not everyone needs their income to start as soon as they are out of work. If your employer pays you sick pay, you might only want your money to kick in after that. The time in between when you stop working and when the life company will start paying you is called your deferred period. You can choose how long this is: 1, 2, 3, 6 or 12 months (4, 8, 13, 26 or 52 weeks).

How do you protect your level of cover from rising cost of living?
There are two different options to help protect your level of cover from rising costs.

  • Inflation Protection – You can decide if you want your cover to increase each year to keep up with the cost of living.
  • Escalation in Claim – You can choose to have your level of cover increase while you’re claiming. With this option, your level of cover will increase each year but only while you are claiming. Your premiums remain unchanged and don’t increase on a yearly basis, but they will cost more at the outset. When you return to work, and you stop receiving payments your annual benefit will revert to the level it was before the end of the deferred period. This means that your monthly premium will be the same as it was before you started receiving payments.

How long does the cover last?
This is the age at which your plan finishes – we call it the ceasing age. You can pick any age between 55 and 70 years.

What is the difference between Personal and Executive Income Protection?

Personal Income Protection
This is suitable if you are self-employed or if you are in a job that doesn’t provide an income protection plan for you. You will pay the premiums, but you can get tax relief at your marginal rate on the premiums you pay. Claiming tax relief is important as it reduces the cost to you by the rate you pay tax at – so either 20% or 40%. For example, if you are a higher rate taxpayer, a monthly premium of €50 would effectively only cost you €30 because of tax relief at 40%. If you need to claim, the life company will pay your income protection benefit directly to you, after tax, USC and any other relevant deductions.

Executive Income Protection
This is designed for employers who want to provide an income protection plan for employees. The premiums are paid for by the employer and qualify as business expenses that can be offset against corporation tax. The employer can also elect to have pension contributions covered under this plan. If you need to claim, the life company will pay the income benefit to your employer, who passes it onto you as the employee through salary, making any relevant deductions such as tax and USC

Key differences are summarised below:

Personal Income Protection Executive Income Protection
Who may it be suitable for? Self-employed people. Employed people setting up a policy independently of their employer. Employers who want to provide income security for key employees.
How is your benefit paid? The claim is paid directly to you, after tax, USC and any other relevant deductions. The claim is paid to the employer, who passes it onto the employee through salary, making any relevant deductions.
What do you need to know? You can get tax relief at your marginal rate on premiums paid. Premiums qualify as business expenses that can be offset against corporation tax. Pension contributions can also be covered under this plan.

 

Do insurers pay income protection claims?
Yes, the life insurers do pay and claim statistics are published annually, for example Aviva paid 92% in total income protection claims in 2021 which totalled €46 million across 2,000 customers.

What does Income projection NOT cover?
Income protection won’t cover redundancy, maternity leave, illness or injury when you return to work in advance of the deferral period.

Is there a cash-in value?
An income protection plan does not acquire a cash-in value. So, at the end of your chosen term – or, if you stop paying the premiums earlier – your cover will stop, and no payment will be made.

We are great at insuring gadgets, the car, the house and even our pets but when it comes to putting in place safeguards for our incomes it can be an afterthought. In my view there is one aspect of financial planning and financial wellbeing that underpins and feeds into all other areas and it is income protection. Simply put when life is going well, it is easy to take money for granted when it pays the bills and lets you take care of your family, enjoy your home, car, hobbies, and holidays. Your income is essential to your quality of life so safeguard it as though it is your very own money tree, this is particularly important when, if like me, you’ve killed every plant you’ve ever owned!

Laura Reidy is Head of Pensions and Wealth Management at Cantor Fitzgerald Ireland.

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