Income Protection Insurance in Ireland
Safeguarding Your Most Valuable Asset - Your Income
What is Income Protection Insurance?
Income protection insurance, also known as Permanent Health Insurance (PHI), pays out a regular income if you become unable to work due to illness or disability lasting longer than a specified deferred period. Unlike other protection products that pay a lump sum, income protection provides ongoing financial support when you need it most.
This cover is designed to replace lost earned income arising from being unable to work for a prolonged period due to sickness or disability. It's important to note that there must be a loss of earned income for the benefit to become payable - it's not enough just to be sick and off work.
Could You Live on State Benefits Alone?
Maximum State Illness Benefit:
€232per week (€12,064 per year)
Most people couldn't cover their mortgage, rent, or day-to-day expenses on that amount. And if you're self-employed, you won't receive it at all.
How Income Protection Works
The Deferred Period
The deferred period is the initial waiting time before your income protection benefit starts to be paid. Common deferred periods are 13, 26, or 52 weeks, although shorter periods are now available. If you choose a 26-week deferred period, you must be out of work sick for at least this period before payments begin.
The shorter the deferred period, the higher your premiums will be, as the benefit becomes payable sooner. Most people choose a 26-week deferred period as it balances cost with practical protection.
Payment of Benefit
Once the deferred period has passed, income protection benefit is payable for as long as you are suffering from disability as defined in the policy conditions. This usually means being unable through sickness or disability to follow your own occupation, or any other occupation for which you are reasonably suited or trained.
The benefit continues until the earliest of:
- You return to work
- You are deemed by the insurance company as fit to return to work
- You reach the benefit cessation age (usually between 55 and 70)
- You retire or become unemployed
Important: Linked Claims
Income protection policies link claims arising from the same cause, so a full deferred period may not apply to each period of illness. If you return to work but have a relapse within a short time, you may be able to claim immediately without waiting for another full deferred period.
How Much Income Can You Protect?
Insurance companies restrict the maximum benefit payable to ensure you always have a financial incentive to return to work. Typically, the maximum benefit is calculated as:
Standard Formula
66% or 75% of pre-disability gross earnings
LESS the single person's State Illness Benefit (€12,064 per year)
Example: Employee
Liam's annual earnings: €75,000
| 75% of €75,000 | €56,250 |
| Less State Illness Benefit | -€12,064 |
| Maximum Annual Benefit | €44,186 |
Even if Liam insured himself for €50,000 per year and paid the corresponding premium, the maximum benefit payable would be €44,186 per year. Combined with State Illness Benefit, his total income would be €56,250 (75% of his earnings).
Example: Self-Employed
Sarah's annual earnings: €60,000
As a self-employed person, Sarah is not entitled to State Illness Benefit.
| 75% of €60,000 | €45,000 |
| Less State Illness Benefit | €0 |
| Maximum Annual Benefit | €45,000 |
Self-employed individuals can protect the full 75% of their income (€3,750 per month in this case), making income protection even more critical for this group.
Reductions to Your Benefit
Payment of income protection benefit is reduced by any other regular income you're entitled to while receiving the benefit, such as:
- Employer sick pay
- Other income protection or disability insurance benefits
- State benefits you're entitled to claim
Key Features and Options
Indexation of Cover
Some policies offer the option to increase your level of cover at regular intervals without requiring new medical evidence. Options include increases of up to 20% every three years or annual increases in line with inflation.
Increasing Claim Payments
For a higher premium, you can choose to have your income benefit increase annually during a claim (e.g., 3% per year), helping maintain purchasing power during long-term illness.
Proportionate Benefit
Also called rehabilitation benefit, this encourages phased return to work by continuing partial payment if you return part-time or to a lower-paid role while recovering.
Guaranteed Renewability
Once issued, the insurance company cannot cancel your policy, no matter how many claims you make, as long as you continue paying premiums on time.
Occupation Classes
Premium rates are banded by occupational risk. Lower-risk occupations (e.g., accountants) pay less than higher-risk jobs (e.g., construction workers). Some occupations may be declined cover entirely.
Benefit Cessation Age
You choose when cover ends, typically between ages 55 and 70. The older the cessation age, the higher the premium, as benefits could be payable for longer.
Advantages and Disadvantages
Advantages
- Financial Security: Provides ongoing replacement income during illness, covering essential expenses like mortgages, bills, and living costs
- Comprehensive Coverage: Covers all illnesses and disabilities (apart from specific exclusions), not just life-threatening conditions
- Tax Relief on Premiums: You can claim income tax relief at your marginal rate up to 10% of your total income
- Peace of Mind: Allows you to focus on recovery without financial worry
- Essential for Self-Employed: Critical protection for those without employer sick pay or State Illness Benefit entitlement
- Customizable Options: Flexible deferred periods, benefit levels, and cessation ages to suit your needs and budget
- Guaranteed Renewability: Policy cannot be cancelled regardless of claims made
- Wider Coverage Than Serious Illness: Covers conditions like back problems or depression that wouldn't qualify for serious illness cover
Disadvantages
- Premium Cost: Can be expensive, especially for older individuals or those in higher-risk occupations
- Limited to 66-75% of Income: Doesn't replace your full salary, which may leave financial gaps
- Deferred Period Wait: You must wait 13-52 weeks before payments begin
- Reviewable Premiums: Some policies allow insurers to increase premiums every 5 years if claims experience is worse than expected
- Occupation Restrictions: Some occupations cannot obtain cover at all; changing occupation can invalidate cover
- Loss of Income Required: You must prove actual loss of earned income, not just inability to work
- Ongoing Medical Assessment: Insurers may require regular medical examinations to continue payments
- Benefits Are Taxable: Income protection payments are subject to income tax (PAYE)
- Unemployment Exclusion: Cover ends immediately if you become unemployed or retire
- Extensive Exclusions: May not cover claims arising from pre-existing conditions, self-inflicted injury, or substance abuse
How Much Does Income Protection Cost?
The cost of income protection varies significantly based on multiple factors:
Age
Premiums increase with age as the likelihood of making a claim rises. Starting cover early can lock in lower rates.
Occupation
Your job significantly affects cost. Office workers pay less than manual laborers due to different risk levels.
Deferred Period
Shorter waiting periods (13 weeks) cost more than longer ones (52 weeks) as claims are paid sooner.
Benefit Amount
The higher the percentage of income you protect, the higher your premium will be.
Health & Lifestyle
Smoking status, medical history, and family health conditions all impact premium calculations.
Benefit Cessation Age
Choosing cover to age 70 costs more than cover to age 60, as the potential claim period is longer.
Real Cost Example
Income protection can be obtained from as little as €10-15 per month for basic cover, though comprehensive policies typically cost more.
Important: Thanks to tax relief, a 40% taxpayer paying €100 in monthly premiums effectively pays only €60 after claiming tax relief at their marginal rate.
Tax Relief Reduces Your Cost
You're entitled to income tax relief on premiums at your highest rate of tax (up to 10% of your annual income). For a 40% taxpayer, this means 40% of your premium cost is refunded through tax relief, making the cover significantly more affordable.
Integration with Life and Pension Assurance Policies
Income protection can be integrated with other financial protection products to create a comprehensive safety net:
Income Protection + Life Assurance
Many people combine income protection with life assurance cover. While life assurance protects your dependants if you die, income protection protects you and your family if you become too ill to work. Together, they provide complete protection against loss of income from either death or disability.
These are typically purchased as separate policies, though some insurers offer package deals with premium discounts.
Income Protection + Serious Illness Cover
These two products work complementary rather than as alternatives. Income protection covers loss of earned income from any illness or disability, while serious illness cover provides a lump sum on diagnosis of specific life-threatening conditions.
The ideal combination for most people includes adequate income protection PLUS some level of serious illness cover (either standalone or accelerated with mortgage protection).
Income Protection + Pension Planning
Income protection complements pension planning by ensuring you maintain an income during working years if illness strikes. The benefit cessation age is typically set to align with your planned retirement age, at which point pension income would take over.
Some pension plans include ill-health retirement provisions that work alongside income protection, though income protection provides broader and more immediate coverage.
Group Income Protection Schemes
Many employers and trade unions offer group income protection schemes for employees and members. These schemes are designed to bridge the gap between employer sick pay/ill-health pension entitlement and a specified level of income (usually 75% of salary).
Group schemes often offer better rates than individual policies and may have simplified underwriting, making them an excellent integration point with employer benefits packages.
Building a Complete Protection Portfolio
Financial advisors typically recommend the following comprehensive protection approach:
- Life Assurance: To provide a lump sum for dependants on death
- Income Protection: To replace earned income during long-term illness (especially critical for self-employed)
- Serious Illness Cover: Accelerated cover on mortgage protection and standalone cover for lump sum needs
- Pension Contributions: To build retirement income, with income protection ensuring contributions can continue even during illness
The self-employed should prioritize protecting at least 66% of gross earnings with income protection, as they have no entitlement to employer sick pay or State Illness Benefit for the first two years of illness.
Important Limitations and Exclusions
Maximum Benefit Restrictions
Life insurance companies impose strict maximum benefit formulas to ensure claimants always have a financial incentive to return to work. You cannot be financially better off claiming than working.
Common Policy Exclusions
- Illness arising from self-inflicted injury or suicide attempts
- Conditions caused by drug or alcohol abuse
- Illnesses related to war, riots, or criminal activities
- Pre-existing medical conditions not disclosed during application
- Failure to follow prescribed medical treatment
- Claims while residing outside specified geographic areas
Occupation Changes
You must inform your insurer if you change occupation. Failure to do so can lead to immediate cessation of cover and refusal to pay subsequent claims. Moving to a higher-risk occupation may result in increased premiums or policy cancellation.
Non-Disclosure Risks
A significant cause of refused income protection claims is deliberate non-disclosure of material facts about health, occupation, or pastimes when applying for cover. Always answer all questions fully and honestly on your application.
Consumer Protection Code Requirements
Under the Central Bank's Consumer Protection Code, advisors must explain the meaning of disability, the benefit available, and any reductions applied to the benefit where there are disability payments from other sources before you complete the proposal form.
Taxation of Income Protection
| Tax Treatment | Details |
|---|---|
| Premium Tax Relief | Income tax relief available at your marginal rate up to 10% of annual income. Self-employed can claim through annual tax returns; PAYE workers can claim through employer or directly from Revenue. |
| Benefit Payments | Income protection benefits are subject to income tax (PAYE) deducted by the insurance company. Benefits are NOT subject to USC or PRSI. |
| Annual Limit | Tax relief on premiums is limited to 10% of your total income for that tax year. |
| Net Cost Effect | For a 40% taxpayer, tax relief reduces the effective cost by 40%. A €100 monthly premium costs just €60 after tax relief. |
Who Should Consider Income Protection?
Income protection is particularly important for:
Self-Employed Individuals
No entitlement to employer sick pay or short-term State Illness Benefit. Income can dry up rapidly during prolonged illness.
Primary Income Earners
If your family depends on your income for mortgage payments, bills, and living expenses, this cover is essential.
Employees with Limited Sick Pay
If your employer only provides statutory sick pay (5-10 days), you're vulnerable to financial hardship during long-term illness.
Mortgage Holders
Ensures you can continue making mortgage payments even if unable to work for extended periods.
Young Professionals
Starting cover early locks in lower premium rates and provides decades of protection during prime earning years.
Business Owners
Protects personal income and helps ensure business continuity if you're unable to work due to illness.
Key Income Protection Statistics
1 in 3 Irish workers will be out of work for 6 months or more during their career
The average time off due to serious illness is 5 years
If you had a machine that printed money every month, you'd insure it. You are that machine.
Income Protection vs Serious Illness Cover
| Feature | Income Protection | Serious Illness Cover |
|---|---|---|
| Benefit Type | Regular income payments | One-time lump sum |
| Coverage Scope | All illnesses and disabilities (subject to policy conditions) | Only specified serious illnesses listed in policy |
| Claim Trigger | Loss of earned income due to inability to work | Confirmed medical diagnosis of covered illness |
| Payment Duration | Until you return to work or reach benefit cessation age | Single payment only |
| Tax on Benefits | Subject to income tax (PAYE) | Tax-free lump sum |
| Tax Relief on Premiums | Yes - at marginal rate up to 10% of income | No tax relief available |
| Availability | Only for those with earned income; some occupations excluded | Wide availability; not restricted to earners |
| Best For | Replacing ongoing lost income; essential for self-employed | Covering specific costs like mortgage payoff or medical expenses |
These two products are complementary, not alternatives. Most financial advisors recommend having both types of cover for comprehensive protection, as they address different financial needs during illness.
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