Income Protection – The Glue that Holds Your Financial Portfolio Together
Income Protection is that still relatively rare product in many people’s financial portfolio. Why is this? Particularly when it covers far and away your biggest asset, your income.
The reason I believe that income protection remains ignored by many people is because they don’t have to take out this cover. Unlike car insurance, which is required to stay on the road, and house insurance and mortgage protection, which are probably conditions of your mortgage, income protection is a discretionary purchase. So it has to compete for your attention with your day to day spending, the spending on your social life, your saving for your holidays and all your other discretionary spending. It’s true paying for income protection is not the most enjoyable use of your money, however it’s a really important use of your hard earned cash. Without your income, everything goes; holidays, your lifestyle, your mortgage repayments, the lot. It’s your income that keeps all of these going for you.
Income protection provides cover against the loss of your income due to illness or accident. That is why we consider it the glue of a financial portfolio. It protects your income, which if you become unable to work may pretty much disappear. Income protection then steps in, replaces your income and enables you to maintain your financial objectives, continue your saving, your pension planning, and the protection for your family, as well as your lifestyle spending.
While obviously the best place to start looking for income protection is by talking to your independent financial adviser (which is covered in detail elsewhere in this newsletter), here are a few features you might not be aware of in relation to income protection.
Did you know that the premiums paid for income protection policies qualify for tax relief at your marginal rate of tax? Unlike health insurance and other tax breaks that only get relief at the lower 20% rate, income protection (like pensions) attracts relief at your highest rate. This can reduce the actual cost by over 40%.
Align it with any existing entitlements
Income protection policies come in all shapes and sizes so this is where your independent financial adviser can really help you. One of the first places to start is to examine any existing entitlements you may have in the event of being unable to work due to illness or accident. Your employer may provide sick-pay for some time and / or you may have entitlement to some social welfare benefits. It’s really important to take these into account when identifying the right income protection cover for you.
The payment of income protection benefit usually begins after a deferred period (waiting period), usually anything from 8 weeks to a year from the date you are first out of work. The longer the waiting period, the cheaper the cover is. So it makes sense to take account of any sick pay that you might get in the short-term.
It’s all about claims
At the end of the day, income protection like all insurance is a simple concept. Lots of people pay in relatively small amounts of money (premiums), from which small numbers of unfortunate people claim relatively large amounts of money (claims) when an unforeseen event occurs.
To ensure you are getting the right insurance for your own circumstances, you need to examine in detail every aspect of the policy that you are going to take out. What does the provider mean by “unable to work”? What is their claims payment record, do they actually pay out? What added services are available – some providers will assist claimants in their rehabilitation and indeed will assist them in retraining etc. if this will help them get back to work, even on a part-time basis. Indeed some will continue to pay you a partial benefit if you manage to get back to work part-time.
The huge benefit of income protection is that claims can be paid right up to your retirement date. This is what makes it such a valuable benefit. There are claims that are currently being paid in Ireland that have been in force for literally decades.
And about premiums too…
Are the premiums that you pay guaranteed or might they increase over the years? While guaranteed premiums might look a bit more expensive at the outset, you get certainty that they will never change. It’s a bit like taking a fixed rate mortgage rather than a variable rate.
At the end of the day, the critical point is recognising how important it is to protect your income as this keeps all your spending possible. After that, you need to make sure that you get the right policy for you. And that is where we come in, your trusted independent financial adviser.