Income protection insurance

Income protection insurance for independent information

About us We are an independent watchdog set up by the Government to: regulate firms that provide financial services; and help you make informed decisions about your personal finances. We do not sell anything. We give you free, independent information in plain English and help answer your questions. How to contact us... Phone In consumer help-line, lo-call 1890 77 77 77 Log In www.itsyourmoney.ie consumerinfo@financialregulator.ie Drop In Information Centre, 6-8 College Green, Dublin 2

Contents Introduction 2 What is income protection insurance? 2 Do I need income protection 4 insurance? What does this insurance cover? 5 What about premium costs? 9 How do I make a claim? 14 Questions to ask about income 16 protection policies Dos and don ts 17 Jargon buster 19

Introduction This booklet describes how income protection insurance works and helps you decide whether you need this type of insurance to protect you or your family against the loss of your income if you become ill. It gives you general information only, and you should always check your own policy for details of your insurance. For more information on other, related types of insurance, go to our consumer website www.itsyourmoney.ie or you can order or download our Life insurance made easy guide and our Serious-illness insurance booklet. See page 19 for an explanation of the terms used in this booklet. What is income protection insurance? An income protection insurance policy pays out a regular cash payment that replaces part of your lost income if you have a long-term illness or disability and you can t work. It is also sometimes called permanent health insurance. Income protection policies are not the same as private health-care plans. If you are ill and need medical or hospital care, private health-care plans help pay for the costs of your treatment. They do not pay out any extra cash benefit. Income protection plans do pay out a cash benefit, but only if you are unable to work and your income is affected because of your illness. The cash is paid out as an ongoing regular income for as long as you are not able to earn an income because of the illness.

What benefits am I entitled to if I become ill and cannot work? If you cannot work because you are sick or disabled, you may be able to get benefits from the state or from your employer. Social welfare disability benefit is a weekly payment you can get from the state. It is not available to people who are self-employed. Your employer may pay you sick pay, by giving you part of your salary or wages for a time after you become sick or disabled. You may be entitled to an ill-health retirement pension. This lets you take early retirement with a pension if you become permanently unable to do your job. If you are a member of an employer pension scheme, you may be entitled to get this type of pension.

Do I need income protection insurance? You may be entitled to get enough money to live on from social welfare, sick pay or your employer pension plan. If so, you may not need extra cover from an income protection policy. However, you may need this cover if: you are self-employed; you would get little or no sick pay from your employer; or you have no ill-health pension protection. Who can buy this insurance? You must be in full-time paid work or be self-employed to get and continue to have income protection cover. You can either: join a group scheme if one is available through your job; or take out an individual policy in your own name. Check with your employer or your trade union to see if you are entitled to join a group income protection scheme through your job. It will usually be cheaper than taking out an individual policy.

What does this insurance cover? Most income protection policies pay out a benefit if: you are unable to work at your normal job because of illness or disability; and you do not work at any other job. When would I receive the benefit? You get your benefit only after you have been unable to work at your normal job and are not working at any other job for a set period. This period is called the deferred period. You can choose from 13 weeks, 26 weeks or 52 weeks. If you choose 13 weeks it costs more than for 26 or 52 weeks because your benefit starts sooner. How much benefit can I claim? You get a proportion of your earnings, less any other payments you get when you are out of work (such as sick pay or social welfare disability benefit). The amount of money you get depends on the maximum benefit allowed under your policy (which may be less than the amount insured). If you are insured through a group scheme, the proportion of your earnings you get depends on what is covered under the group policy. Your employer decides the amount of cover you will be insured for.

If you have an individual policy, you can set the amount you want to be insured for, when you take out the policy. The policy terms and conditions will tell you the maximum amount you can claim. It is usually 75% of your earnings before you became ill or disabled, less any other income you get while out of work, such as sick pay or social welfare disability. Your provider should advise you of the maximum potential benefit you can get and the premium you will pay for that level of cover. You should check with your provider, on a regular basis, that you are covered for the correct amount. The following example shows how your benefit is reduced by any other income you get while out of work. Joe is an employee earning 40,000 a year. He has an income protection policy that will pay up to a maximum of 75% of the amount he was earning before he became unable to work, less any other income he is receiving. Joe has recently become unable to work because of illness. He puts in a claim to his insurance company and starts to receive his payment after 26 weeks, which is his deferred period. Joe must tell his insurance company what other benefits he is getting while he is out of work. These are: sick pay of 750 a month from his employer; and a social welfare disability benefit of 750 a month.

Example: Monthly benefit for Joe as an employee a month Insured benefit 75% x 40,000 a year = 30,000 2,500 Less: sick pay a month - 750 Less: social welfare a month - 750 Maximum benefit a month from the insurer 1,000 Joe s insurance company will pay him the difference between 75% of his salary and any other income he is receiving while he is out of work, which is 1,000. The other 1,500 is received as a social welfare payment and from his job as sick pay. Now suppose Joe was self-employed. He would not be entitled to social welfare disability and he would not receive sick pay from an employer. His maximum benefit would be the same as his insured benefit of 2,500 per month. Example: Monthly benefit for Joe if he is self-employed a month Insured benefit 75% x 40,000 a year = 30,000 2,500 Less: sick pay a month Less: social welfare a month Maximum benefit a month from the insurer 2,500 Remember that the actual calculation is different for different policies, social welfare disability benefit and sick-pay entitlements.

Some policies offer the option to increase the cover each year in line with inflation. This is called index-linking. Your level of cover could increase by about 5% each year if you choose this option. Your premium would also increase each year to pay for the increases in cover. However, if your income is not likely to increase in the future, you should regularly check that your cover does not go above the maximum benefit payable under the policy. You can also index-link your benefit so that the cash amount paid out to you during a claim will increase regularly. Again, you can expect to pay an extra premium for indexing your benefit. How long will I continue to get my benefit? Your insurer will usually stop paying your benefit as soon as one of the following events happens: you return to work; you reach the end of the policy term, which could be your 55th, 60th or 65th birthday, depending on the policy; the insurer s medical officer, who may check your medical condition from time to time, decides that you are fit to return to work; or you die.

What about premium costs? Generally, a policy through an employer s group scheme has cheaper premiums than an individual policy. Also, insurance companies usually do not need as much medical information on employees in a group scheme. With an individual policy, insurance companies look for detailed medical information. The most important factors in the cost of your premium are: the amount of cover; the deferred period (see page 5); and the term of the policy you want. After that, the main factors are your age, gender (sex), health, family medical history, job and lifestyle.

Age Gender Smoking The current and past state of your health Health risks increase as you get older, so the premiums are higher the older you are when you take out a policy. Premiums are higher for women than men because there are more illness claims from women than from men. Premiums for smokers can be up to twice as much as for non-smokers because smoking increases the risk to your health. If you have a medical condition or have a family history of certain illnesses, you usually pay a higher premium. Why does my job affect my premium? Some jobs are riskier than others. Insurance companies put jobs into classes, and charge different premiums for each class. The chart on page 11 is only an example and will be different for each insurance company. People with class 1 jobs are considered the lowest risk and would pay the lowest premium. People in classes 2, 3 and 4 usually pay a higher premium. People in class 5 jobs may be refused cover because they are considered a much higher risk. 10

Occupation classes Class 1 Class 2 Accountant Bank official Barrister Chemist Computer programmer Bookmaker Hairdresser Laboratory technician Caterer Class 3 Electrician French polisher Nurse Vet Class 4 Farm worker Floor layer Garage mechanic Landscape gardener Plumber Remember that insurance companies use different ways to classify jobs. It depends on their claims experience and business strategy. You should check with individual insurers. 11

What might I pay for my insurance? The following table shows the monthly premium from three different insurance companies for a man and woman who are each insured for cover of 2,000 a month. Example: Monthly premium to provide cover for 2,000 a month up to age 65 Male Female Insurance Company A 44.64 65.38 Insurance Company B 51.23 75.58 Insurance Company C 34.48 51.85 The table assumes that the cover is for a man and woman who will both be 40 on their next birthdays. They are both working in low-risk jobs, are non-smokers and are in good health. The policies are not index-linked. The table also assumes there is a deferred period (see page 5) of 26 weeks. Figures shown are before tax, and correct at April 2007. 12

Is my premium fixed? Your premium is usually fixed for a short period. After that time it may increase. If your premium is due to increase, your insurance company may let you choose to pay the increased premium or to accept a lower level of benefit for the same premium. Some insurance companies offer fixed premium policies, where the premium stays the same for the term of the policy. You will pay a higher initial premium for this cover than for policies where premiums are not fixed. Can I get tax relief on premiums? You can get tax relief, at your highest rate of tax, on your premiums up to a yearly limit of 10% of your total income. If you are a member of a group scheme, your employer usually takes your premiums from your salary before income tax and pay-related social insurance (PRSI) are taken off. You don t need to send any extra details with your tax return. If you have an individual policy, your insurance company will give you a statement showing the premiums you have paid. To claim your tax relief, you simply include this information in your normal tax return. For more information, log on to www.revenue.ie Do I have to pay tax on my benefit? Income protection benefit is treated as income, so your insurance company must take tax off on a pay-as-you-earn (PAYE) basis before they pay you. 13

How do I make a claim? You must fill in a claim form and send it to your insurance company. The insurance company will get medical proof from your doctor, and may also ask you to have an independent medical examination. If your claim is valid, you will get your first payment after the deferred period is over, if you are still unable to work at that time. If you have returned to work, you will not receive any benefit. In a small number of cases, an insurance company may decide not to pay a claim. This could happen if your claim does not meet the terms and conditions of the policy. Because of this, it is important to read the terms and conditions carefully before you sign up for a policy. Could my insurance company refuse my claim? Your insurance company may refuse your claim in certain situations for example, if a claim is caused directly or indirectly by: war, riot, revolution or a similar event; taking part in a criminal act; drug or alcohol abuse; or other self-inflicted causes. These are called exclusions. It is important that you know these exclusions before you take out a policy. 14

You would also not usually be covered if: you did not follow medical advice; your illness or disability was caused by a dangerous hobby such as hang-gliding or parachuting; you changed jobs and didn t tell the insurance company; you moved abroad and didn t tell the insurance company; or you did not tell your insurance company about a pre-existing condition or you lied about your medical history. If you have an individual policy, there may also be specific exclusions. For example, your policy might exclude any claims for stress if the insurance company thought you worked in a job with a high level of stress claims, or your policy might exclude claims for back injury if you had a previous history of back pain. Some income protection policies cover you only if you become severely disabled and are not able to carry out any job. This type of policy provides very little protection. You would need to become severely and permanently disabled before you could claim any benefit. Make sure you fill in your proposal form fully and truthfully. If you give any inaccurate information when you apply for cover, any claim you make may not be valid. 15

Questions to ask about income protection policies Do I need income protection insurance? Is there a group scheme that I can join? What is the maximum benefit I can get? What conditions do I have to meet to claim benefit? What is the premium and can it be increased? Can I increase my cover in line with inflation (see page 8)? What is the extra cost to do so? Will my benefit during a claim increase regularly or will it stay the same? Can I pay extra to have my benefit increased regularly during the period of my claim (see page 8 for more information)? How much tax relief will I get on my premium (see page 13)? 16

Dos and don ts Do Do check whether you are entitled to social welfare, sick pay or ill-health retirement pension. Do find out what cover you could get through a group scheme at your workplace. Do shop around. Premiums and benefits can vary widely and can make a large difference over the period of your cover. Do ask your provider about any fees you have to pay. Do fill in proposal forms fully and truthfully. If you give false or incomplete information any claim you make may not be paid. Do remember that (with some exceptions) you have a cooling off period during which you can cancel a policy and get a refund of any premiums paid. Do pay your premiums on time or your policy could lapse and you would not be able to make a claim. Do review your cover from time to time, particularly when your circumstances change - for example, if you change your job. Do keep a list of your policies and let someone know where they are. Do check with your provider, on a regular basis, that you are covered for the correct amount. 17

Dos and don ts Don t Don t cancel an existing policy to take out a new one unless you have a good reason. Because you are older, the new cover is likely to cost more. A new policy may have more exclusions, particularly if your job or health has changed. Don t buy insurance that you don t need or already have. Consider what types of benefit are covered by your job or by any pension plan you have. 18

Jargon buster Cover: The protection insurance gives you. Cover can also mean the amount of money (or benefit) you will get if you are not able to work because of an illness or disability. Deferred period: The amount of time your insurance company will postpone paying your benefit after you become ill or disabled and you can t work. Exclusions: Exclusions (or restrictions) are situations that are not covered by your policy issued by a particular company. Standard exclusions are exclusions that are in every policy. Specific exclusions are exclusions the insurance company adds to your policy. Index-linking: Index-linking means your insurance company will increase your policy benefit to keep up with inflation. Policy: The insurance contract between you and an insurance company. Premium: The money you pay to the insurance company in return for the cover of the insurance policy. You usually pay a monthly premium by direct debit. Term: The number of years the policy will be in place. 19

20 Notes

How to contact us... Phone In consumer help-line, lo-call 1890 77 77 77 Log In www.itsyourmoney.ie consumerinfo@financialregulator.ie Drop In Information Centre, 6-8 College Green, Dublin 2 This is a general guide to income protection insurance. Nothing in this booklet is intended to be, or should be considered to be: 1 an invitation, offer or incentive to you or any other person to enter into a financial arrangement; or 2 advice on, or a recommendation of any particular product or product provider. The contents of this publication may be reproduced with the acknowledgement of the Financial Regulator. Reproduction or use for commercial or marketing purposes is prohibited. Irish Financial Services Regulatory Authority 2007.

www.itsyourmoney.ie DL 06/07 IPI