What if you are unable to work due to illness?

25 November 2021

If the Covid-19 pandemic has taught us anything, it’s that the “unthinkable” can happen and it does happen from time to time.

As we begin to return to some level of normality or just find ourselves adjusting to the “new norm”, we are seeing more and more clients facing the reality that no one is invincible, and people can’t afford to take a laid-back attitude towards their future. One thing for certain is that life is very unpredictable, and the pandemic experience has prompted more people to start considering how they would manage financially if they became ill and unable to work.

Have you thought about what would happen if you were unable to work due to sickness? Would your employer pay you? If so, for how long? With the state disability benefit of only €203 per week, it is not usually sufficient to cover all the costs, so it is down to the individual to protect their main asset, their salary. If self-employed, do you have any insurance in place to pay you? If not, how would you continue to pay your mortgage/household bills?

According to research recently carried out by Aviva, 2 in 3 people do not have any provision in place and do not know how they would cover their monthly expenses if they could not work for an extended period due to illness or injury.

Ideally, people should start assessing their finances and protecting their income as soon as they start working but once you take out a mortgage or have dependents, it is definitely something that you need to consider.

The cost of protecting your income (Income Protection) is one of the only benefits at which you can still receive tax relief at your marginal rate (so if you pay tax at the higher rate you will get tax relief at the higher rate) which makes the cost of such a policy more affordable.

Income Protection is protection against being unable to work due to illness or accident. In essence, it is a policy to help replace your income if you are not physically capable of carrying out your work. An Insurance Company effectively steps into the shoes of your employer and pays your regular income instead, at your income protection benefit level (this cannot be more than 75% of your actual income).

When taking out an Income Protection policy, you choose a deferred period. This is effectively a waiting period of anywhere from 4 to 52 weeks before your claim becomes payable. The longer the deferred period, the lower the cost. Ideally, you would have savings or an ‘emergency’ fund in place to cover the period from when you are off work up until your policy would start.

The benefit continues to be paid until your retirement date; therefore, it ensures your income is maintained right up until the end of your working life. Of course, if you recover in the meantime and return to work the benefit ceases as your employer would recommence your actual income at that stage. It is also possible to return to work at reduced hours and receive a reduced benefit from your Income Protection if you are unable to return to full-time work.

Claims statistics released by Aviva show that the average length of time people claim for is five years, that’s a long time to be without an income if no provisions have been made in advance.

Jacinta Clerkin BSc QFA FLIA RPA is a Qualified Financial Advisor, Fellow of the Life Insurance Association and Retirement Planning Advisor. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on jacinta@jfl.ie.

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