BY JOHN ELLIS, FINANCIAL ADVISOR
Income protection is the most tax efficient means to provide an income should you become ill or have an accident and be unable to earn.
Who would pay for your mortgage, gas, electric, phone, food, children’s education, car payments, holidays, insurance, pension, home repairs etc, if your income dried up tomorrow?
Do you think your salary is protected by another insurance product eg. mortgage protection, loan repayment protection and critical illness cover? Well, it’s not in most cases! Less than 10% of us have any form of private salary protection.
Income protection, a form of disability/sickness insurance, can help you stay on top of the bills that matter, even if you are unable to work for three months or more due to illness, injury, or disability.
The cover can be provided up to age 65 and, if you wished, you could cover off your pension contributions each month. So not only are your bills not building up, but your pension provision need not suffer either while you are recovering
With income protection, you take control of your financial security. By paying a monthly premium, which is determined by your employment and health status, you will receive a regular income for the complete duration of your illness until you return to work or retire. Not only that, but the Revenue within certain limits will also give you the same level of tax relief on your premiums that they give to pension contributions. So your costs could be reduced by up to 40% with tax relief at source.
Imagine if you were lucky enough to have savings of €50,000. Suppose you get sick. Think! You have no income protection. Your salary ceases nearly immediately. You become dependent on social welfare. Not to worry you have savings. You begin to use your saving at a rate of €3,000 per month. Your savings are gone in 17 months! What then?
Fortunately, there’s a way of ensuring that in the event of an injury or illness that leaves you unable to earn, your financial commitments will be met, and your lifestyle protected, thereby giving you peace of mind to focus on your recovery.
The cost of an income protection plan depends on the option you choose. It’s dependent on your age, your occupation and your health. It is very easy to fit a plan into your budget that you can review as your circumstances change.
With new entrants coming into the income protection market offering discounts on premiums and price matching other companies offerings there is great scope for to effect a meaningful plan within your budget.
Here are two examples…
Philip is a quantity surveyor currently earning €50,000 a year and is 30 years old.
He has chosen to protect 50% of his salary ie. € 25,000 a year until his retirement age of 65. He selects a six-month waiting time and chooses to index-link his premiums.
Now consider this…. If Philip were to claim on his policy in two years’ time (aged 32) and his claim lasted for the average duration of five and a half years, he would be paid over €156,259 in benefits. If he were unable to return before retirement, then over that 35-year period he would be paid a total benefit of €1,460,000.
Fiona is a 35-year-old sales rep currently earning €72,000 a year.
She has chosen to protect 50% of her salary ie. € 36,000 a year until her retirement at age 65. She selects a six-month waiting time and chooses to index link her premiums.
Now consider this…. If Fiona were to claim on her policy in two years’ time (aged 37) and her claim lasted for five and a half years, she would be paid over €224,000 in benefits. If she were unable to return before retirement, then over that 28 year period she would be paid a total of € 1,639,636 in benefit.
In each example they both get the protection of a regular income during difficult times, tailored to their needs and circumstances. It is flexible, customisable and packed with features.
You need to review your income protection plan at least every three years to be sure you have the most suitable plan in place and you make be pleasantly surprised with a premium reduction.