If you’re sick, or unable to work, it’s possible you’d feel an awful lot better if you received a tax-free lump sum or had replacement income coming in. In previous blogs, I covered off on these two quite different forms of protection. Specified Illness Cover and Income Protection sometimes referred to as Permanent Health Insurance. Whilst quite different in nature, they both offer valuable cover. It is very important to have a clear understanding of the subtle differences between the two. There are many statistics and figures available on claims and the way these types of cover can be set up so I see no need to rehash these again. My aim as always is to keep the message as simple as possible so you can grasp the principal points.
Advantages of Income Protection:
• Replaces Income in the event you are unable to work due to an illness, accident or disability.
• Straight forward claims process, the main claims being for orthopedic and psychiatric related illnesses. These stress, limb or back related illnesses wouldn’t be covered under the specified illness definition. Not unless so severe in nature, it satisfied one of the specified illness conditions itself.
• Will continue to pay you this income up until you are either 1) able to return to work or 2) retire at your selected retirement age.
• The premium is tax deductible against your marginal (higher) rate of tax. For example, a 40 year old accountant looking for yearly income replacement of €60,000, with a Deferred Period of 13 weeks and payable to retirement age of 65 would have a gross premium of approx. €160 per month. After tax relief, this would be reduced to just €96 per month.
• For the self-employed, this is particularly vital cover. They have little or no access to social welfare benefits and can find their income and any savings disappear in the event of being unable to work.
Disadvantages of Income Protection:
• You will not receive any income benefit until you serve out your chosen Deferred Period. This is normally anything from 4 to 52 weeks.
• There must always be an incentive to return to work, if and when you’re able so you cannot cover all of your income. The maximum cover allowed is 75% of your pre-sickness income, less any social welfare benefits you may be entitled to. This is currently just over €10,000 per year.
• Your claim for income replacement will be paid on a weekly/monthly basis, so no lump sum for additional expenses or that much needed holiday break.
• As this is income replacement, you will be liable to income tax, PRSI & USC.
• The underwriting process when proposing for the cover is medically quite stringent and income restricted.
• Some occupations, particularly the more heavy manually-based ones have difficulty in getting cover in the first place.
Advantages of Specified Illness Cover:
• Pays out a lump sum in the event of being diagnosed with one of the listed specified illnesses.
• This lump sum is paid out completely tax-free
• This lump sum can be used at ones discretion to pay down debt, cover medical expenses or start a new business.
• There’s flexibility around how much you can insure yourself for. You’re not restricted to a percentage of your income. So even though your salary is say €40,000, you could quite easily insure for a lump sum pay out of €200,000 or more. The same 40 year old proposing for €200,000 cover to age 65 and having a valuable conversion option would have a premium of approx. €120 per month.
• There’s no need to stay off work. Claimants who have suffered from certain cancer or heart related illnesses can quite often return to work within a short period of time.
Disadvantages of Specified Illness Cover:
• There is no tax relief on the premium.
• It is more difficult to make a claim against than on your Income Protection. You must suffer from one of the listed specified illnesses and then to a certain degree of severity.
• You can only claim once, so when the lump sum is paid, it’s paid. There is no further pay out regardless of how long you’re unable to work or earn an income.
In summary, Specified Illness cover will only pay out if your illness satisfies the severity of one of the listed conditions. The worst scenario in this case is you’re out sick, unable to work but unable to claim as you’re condition isn’t bad enough. Imagine being in that situation, wishing to be a little bit sicker! Not a nice thought! Income Protection on the other hand will pay out if you’re unable to work due to an illness, injury or disability, so no real worries there at claim stage.
So, which is best? Well, like a lot of financial planning issues, that depends on your circumstances. In a nutshell, the biggest difference is one pays out a tax-free lump sum while the other pays you a regular income. Depending on affordability and accessibility, a bit of both might be the ideal solution. As always, if you’re considering looking at either, you should speak with a Certified Financial Planner.
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Paul is the Managing Director of Lifestyle Financial Planners Ltd and been in the Financial Planning business since 1985. Lifestyle Financial Planners offer specialist, tax-efficient wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner and holds a Masters Degree from UCD in Financial Services and Risk Management.
Tel: 096-70854 Mob: 086-8053755, www.lifestylefinancialplanners.ie
The information contained in this article is for general information only. It should not be used as the basis for any form of agreement or advice. We recommend readers seek separate tax and legal advice where necessary. This information is of a generic nature and does not take into account your own particular circumstances. Investment funds can fall as well as rise.
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