Income Protection Insurance

If you suffer an accident or illness that renders you unable to work for months or even years, your income may be at risk.

Most people tend to assume that their employer or the State will ‘look after them’ anyway if they are unable to work for a prolonged period.

This may well be true if you are a public sector worker, but it is estimated that only around 15% of private sector workers are entitled to sick pay for more than six months.

There is no legal obligation on employers to pay sick pay in Ireland. 

You are particularly vulnerable if you are self-employed as you will not get any employer sick pay, but you will not be entitled to the State illness benefit (previously called disability benefit) either.

If you are a private sector worker and are not covered for sick pay from your employer, you would be entitled to a maximum yearly allowance of just €10,623.60 under illness benefit.

It used to be the case that you would get this benefit for as long as you were unfit for work, if you had made enough PRSI contributions.

But following a change in the Budget in October 2008, llness benefit is now only payable for up to two years for anyone who applies after January 2009.

All these facts start to make income protection insurance look almost essential, particularly for the self-employed and those with little or no employer sick pay cover.

An income protection policy (some still call it permanent health insurance, or PHI) will provide you with an income in the event that you cannot work due to an illness or an accident.

The benefit is typically up to 66-75 per cent of your current salary or earnings, and in most cases will keep paying out until you get better.

There are now four providers of such policies on the Irish market: Friends First, Irish Life, Canada Life and - the most recent entrant - New Ireland, a division of the Bank of Ireland.

Ultimately, what you pay for your policy will depend on your age, gender, what kind of job you have, your medical history and the amount of your benefit.

The cost will also be determined by the ‘deferred period’ that you choose, which is the initial period of inability to work before the benefit becomes payable.

The period varies, but is typically 8, 13, 26 or 52 weeks. If you choose 8 weeks, your policy will be more expensive than if you chose 13, 26 or 52 weeks.

The level of your quote can also depend on whether your policy is reviewable or guaranteed.

If guaranteed, that means the premium will remain the same for the duration of the plan, but will be more costly than a reviewable policy, where your provider can review the premium every year or every five years.

To confuse matters even more, you can choose to index your policy, which means your benefit will increase annually in line with inflation, but this will also add to your premium.

It is worth noting here that you can claim tax relief at your marginal rate on any premiums you pay for income protection policies.

Some companies sell income protection as part of a pension policy, but this is regarded by some experts as much less cost-transparent than a standalone policy.

Some employers or trade unions may offer group PHI schemes, which typically kick in after six month’s absence.

It is certainly more likely to be cheaper if you are an older worker, as group policies are priced according to the average age of all those insured.

Information correct as of 19th May 2010