Income Protection and Critical Illness Cover

Income Protection and Critical Illness Cover

How long would your money last if you were unable to work because of sickness? The sobering fact is that the average family has enough savings to see them through just 18 days,
With interest rates rising, household finances are becoming stretched and many families would struggle if they lost their main income.

In a recent survey for Bank of Ireland – When asked how they would cope financially if either one became seriously ill and could not return to work 36% of parents did not know how they would cope. Nearly two-thirds of parents with children under 18 years, said they would cash in any savings & investments if this happened, while just 3% said they would get a loan or borrow money from friends and family. However with the average SSIA savings lump sum at just eur14,000 the family savings may not be enough to support a family during these difficult years.

There is always the Social Welfare system to fall back on – that is why we pay PRSI. Nobody would be destitute – but income could be significantly lower. A typical family with two adults and 2 children would qualify for € 18,360 – tax free – plus medical cards – not insignificant but would it be enough to live on?

Another option would be to move to a smaller house – generating capital from any equity and reducing mortgage payments. But moving home could have a significant impact for any family with children. For example the children may have to move schools and leave their friends, while parents may lose the support of family and friends that lived locally.
The option of the healthy parent doing two jobs is also not ideal, as they will want to spend some time with their ill partner and children, and perform some of the necessary household duties.

There are a number of insurance products designed to help in such circumstances. The most popular is critical illness insurance, which pays a lump sum if the policyholder is diagnosed with one of a number of serious illnesses. In theory, this should pay off any outstanding mortgage if the breadwinner is forced to give up work because of cancer or a heart attack.

Sample Cost – for Life Assurance & Critical illness cover eur 49.85 per month
(Based on eur100,000 dual life cover and eur50,000 dual Critical illness insurance for a couple both aged 30, both non-smoking, over a term of 25 years, with Bank of Ireland Life)

Another option is income protection insurance – it can provide more comprehensive cover than ctitical illness cover. Crucially, it provides a regular income, rather than just a one-off lump payment and will pay out for a far wider range of illnesses.

The most common reasons for people to be signed off sick are stress, depression – and back pain. Neither of these would trigger a pay-out from a critical illness policy but would be covered by an income protection plan.

Income protection insurance also ensures that policyholders receive a regular monthly income for as long as they are signed off sick, for serious conditions this payment will continue until they reach retirement age.
In contrast, most Accident and Sickness plans only pay out for a maximum of two years and some for only 12 months.
Anyone taking out an income protection policy insures a proportion of their income – typically the maximum allowed is 50 per cent of your current salary. However this benefit is paid tax-free, so in net terms the amount of benefit paid is roughly equivalent to 75 per cent of a person’s take home pay.

Policyholders can also claim more than once on an income protection policy. For example, if you are off for months with a back complaint, the policy will pay out. Provided you keep paying the premiums when you go back to work, you will still be covered and you can claim for the same condition again.

The cost of an income protection policy depends on a variety of factors, including a person’s age, occupation, salary and health.Anyone considering an income protection policy needs to ensure they have “own occupation” cover. This ensures that the policy pays out if you are unable to do your own job. Some cheaper policies offer “any occupation” cover which means they will only pay out if you are too ill to undertake any type of paid work.

It is also important to look at the deferral period. Standard income protection policies will pay out after the policyholder has been off work for three months: this is because most employment contracts will provide sick pay during this period. But if you are self-employed and don’t have sufficient savings to fall back on, you should take out a policy that has no deferral period. This will of course be more expensive than a standard policy.If you are lucky enough to have a longer period covered by sick pay – for example a civil service job – you can reduce your premiums by going for a policy with an extended deferral period. Some policies will also deduct any state benefits received from the payout.

Sample cost – Income Protection
As an example, the following is a quote for a non smoking male aged 35 next birthday, a 30 year term, based on a 13 week deferred period claiming a benefit of €2,200 per month.

He will pay *€38.59 after tax relief at 41 % per month for an income of €2,200 per month!

*Tax has been deducted on the above premium at the higher rate of tax. Tax relief must be arranged by claimant directly.

When looking to protect your family’s finances it is important to weigh up the pros and cons of the various policies available. Critical Illness cover or Income protection won’t be ideal for everyone but families should consider them.