Why is it needed?
The need for such a scheme arises as in the event you being unable to work due to a long term illness. Most permanent pensionable employees in the public sector are paid a full salary for 6 months followed by 6 months of half pay in the event of ill health. There are differences from one profession to the next with teachers for example receiving up to 12 months full pay.
Once sick pay entitlements run out, you may be entitled to claim a Disability Benefit or Invalidity Pension from the Department of Social Welfare. Depending on length of service history you may also qualify for an Ill Health Early Retirement Pension from your employer. In both instances your income will be significantly lower than your pre-illness salary.
Salary protection or income continuance policies are designed to protect against such a sharp drop in income and cause financial worries at a time when your focus will more than likely be on your health.
How does it work?
A salary protection policy will pay a benefit bringing the you back to a maximum of 75% of your pre-illness salary, the highest amount allowed by law. You will be paid this until you are fit to return to work or until the age of retirement. This will allow to meet you ongoing household expenses such as mortgage payments, loans bills and so on.
Note that this is not health insurance, it is not cover against you incurring medical expenses, rather it is cover against you being unable to work and earn a salary. It is arguably more important as you use your salary to pay your health insurance premiums.
How much does it cost?
For groups policies it is usually a set percentage of your salary regardless of your individual circumstances. So a smoker in their 50's pays the same percentage pay the same percentage as a non-smoker in their 20's. In such circumstances it can make sense for younger individuals to take out an independent policy. Factors which affect the price are:
- Smoking status
- Medical history, rates and cover are subject to medical underwriting
- Age to which you wish the cover - 55, 60 or 65
- Level of cover required
- When the cover kicks in, after 3 months, 6 months or 12 months
- Whether you want a guaranteed policy with premiums that don't change over time or one that can be reviewed by the insurer
- If you want benefits to increase cover time or remain level
- Choice of insurance company
A male Civil Servant aged 30, non smoker, earning €40,000 p.a. paying A1 PRSI, planning to retire at age 60.
- Once sick pay entitlement from employer ceases the Illness Benefit from Department of Social Welfare kicks in at €196 per week or €10,192 per annum.
- Maximum income is 75% of pre-illness salary so in this case €30,000.
- Civil servant would need an income protection policy to pay the difference between the social welfare benefit and this maximum or €19,808 per annum.
- This benefit would be paid until they could return to work or to ceasing age of 60.
- Typical costs would vary between €17 and €23 per month.
- Premiums qualify for tax relief so after relief at 41% the real monthly cost is only between €10 and €14 per month.