What is it?
Income Protection or PHI (Permanent Health Insurance) is a protection policy, offered by a small number of life assurance companies, that pays out an income should the individual insured suffer a loss of income, by being unable to work due to sickness or injury, lasting longer than the deferred period.
The deferred period, is the initial period of inability to work due to illness or injury, before the benefit under the income protection policy becomes payable. The deferred period is chosen by the policyholder when taking out the policy and is set at either 13, 26 or 52 weeks.
This type of policy is a permanent policy, no matter how many claims or the duration of the claims made, the protection is still in place until the end of the term of the policy, once the premiums are paid on the policy.
Do I Need Income Protection?
If you are self employed, you do not share the same level of social welfare benefits as a PAYE earner. The harsh reality is; that if you are self employed, your income is dependant on staying healthy. It is essential that you protect your income stream from the risk of interruption due to illness or injury. One of the primary aspects of this type of protection policy is that the premium is tax deductible, see below.
For PAYE workers, the state disability benefit is payable during periods of absence from work due to illness or injury. State benefits are designed to provide for basic living expenses, they will not be sufficient to repay mortgage payments or other loans. Your employer may have a group PHI scheme for qualifying employees. It is important to understand what benefits may be paid by your employer’s group policy if you were to become ill or injured and unable to work.
What Income Can be Covered?
The maximum level of income that can be protected is 75% of the first €125,000 of earnings, plus 33% of the balance up to a maximum amount of €175,000 (less social welfare benefits for the employed). Cover can extend to age 65 years. However a term can be chosen which ends before age 65 years, for example age 60 or age 55.
How Much Does it Cost?
The premium payable depends on; the level of income protected, the term of the policy, the age of the insured, smoker status of insured, health details and the occupation of the insured. Occupations are risk assessed and classed depending on the level of risk. An office based employee will typically pay less premiums than a say a worker on a construction site. Some occupations will not be accepted for cover. See below for the tax relief allowed for premiums paid.
The most significant aspect of income protection insurance is that the premium is tax deductible. Therefore for a top rate tax payer the premiums are allowed as a deduction when calculating your income tax liability. There is an annual limit of allowable premium up to 10% of the individual’s annual gross income.
PAYE employees can gain income tax relief at source and do not need to make a tax return in order to gain the relief.
Indexation – Keeps your cover in line with inflation. Your premiums will also increase by the same rate.
Guaranteed Premium – This option will ensure that your premium will not be reviewed in the future. You will know how much your premiums will be from the outset and there is no impact on premiums if you make claims against the policy.