Income Protection: your salary drops to €900 per month, would you cope?
Have you ever considered how you and your family would cope if your income was reduced to €900 (before tax!!) per month?
Unfortunately, it can happen.
Think of this, life is good, you’re working and earning.
We’ll assume a salary of €50,000 per annum or €4,166 per month, before tax.
However, a life event we never want to consider strikes.
Illness or injury and you are now unable to work.
You work for a good employer who provides you with 3 months sick pay.
However, you are at the end of this and it is no longer paid.
You now move onto the state disability benefit which is the equivalent of only €900 per month. Before tax!
This would equate to an 80% drop in your income coming in.
Furthermore, if you’re self-employed, there is no state disability benefit so you have no income coming in at all.
Now, just because your income has reduced, do your household bills and commitments reduce?
Of course they don’t.
The mortgage still has to be paid.
The light and the heating, amidst the current energy crisis, still have to be paid.
Food still has to be put on the table.
Maybe the kids college fees still have to get paid.
Also, you are likely to feel an increase in medical bills (you’re sick right?!).
Let’s discuss how the basic foundation of financial planning is protecting what’s most important, your most important asset, you’re income.
How can you avoid this scenario?
Your most important asset is not your family home (can’t take a couple of bricks off it and pay for the groceries!).
Nor is it your car or the holiday home.
It is your income and your ability to earn your income.
Your income is what pays your bills.
It pays for the family home, and the car, feeds the family, puts clothes on their back, finances the holidays and keeps you insured etc.
If you had a money making machine in the garage that printed €50 notes for you, would you be worried about it breaking down?
Of course, you would.
If you could effect insurance to replace those €50 notes should it break down, would you?
Of course, you would.
Newsflash #1, you are the machine that earns the money and you have to protect the €50 notes against the machine breaking down.
It’ll Never Happen To Me
We all go through life thinking we’re healthy and nothing will change.
Unfortunately, we may have seen someone we know or close to us get sick.
I’d hazard a guess everyone reading this has known someone young at some level to get sick.
Nevertheless, we still think it won’t happen to me.
We think we’re bulletproof.
Cancer in Ireland
Almost 45,000 people in Ireland get diagnosed every year.*
Newsflash #2, we’re not bulletproof.
We can all get sick or injured.
Note for the above, I have zoned in on a sickness statistic however loss of income also relates to injury.
If I get sick or injured, I’ll use my savings
You may have savings however one would be surprised at how quickly your savings are spent.
For this purpose, we will assume a potential claimant has €50,000 saved in the bank.
We will also assume monthly household outgoings of €3,000.
The €50,000 would last just 17 months.
Let’s assume you get better and back to work after the 17 months.
As a result of not planning correctly, practically, you have spent all of your savings you worked hard to accumulate, in less than a year and a half just to keep you afloat financially.
And when they are gone, they’re gone.
Enter, income protection?
So, what is income protection?
In its simplest form, Income Protection is protection that replaces a % of your income should you be unable to work mid-long term due to illness or injury.
Practically, you will still have a regular salary, to some level, being received through your illness or injury.
Meaning you can still meet your financial commitments.
It is the base of ANY financial plan.
Oh, and the Government will cover 40% of the cost for you (assuming you pay 40% income tax), more on that later.
How much income protection do I need?
There is a maximum allowable benefit.
This is 75% of your salary including the state disability benefit.
Any higher and there would be no incentive to return to work!
If the maximum benefit is above your affordability, opt for a reduced amount.
50% coverage, for example, is better than zero coverage.
Example 1. You are an employee, earning €50,000 per annum, the maximum benefit allowable is €26,684 (€50,000 x 75% less €10,816 state disability benefit).
Example 2. You are self-employed. Drawing a salary of €50,000 from your company, the maximum allowable benefit is €37,500 (€50,000 x 75%, no entitlement to state disability benefit).
How long could income protection pay me?
If you claim income protection, it will pay you to the earlier of two scenarios:
- You are fit enough to return to work or
- The normal retirement age you choose at outset (typically 65)
How much does income protection cost?
That depends, on a number of factors.
Some factors are age, smoker status, and occupation.
If your occupation is typically desk based that would cost less than say an occupation with manual work.
Unfortunately, some occupations can’t even get the cover.
Revenue, however, will cover a % of the cost to you as they allow full tax relief at the rate of income tax you pay.
Therefore, if you pay income tax at 40%, 40% of the cost will be covered for you.
If you are self-employed drawing a salary from your Ltd company the company can provide this benefit to you and the full cost is tax-deductible against corporation tax.
Summary
Unquestionably, income protection is the most important insurance financial and insurance product anyone can have.
No ifs, no buts.
For anyone who earns a salary, it would be extremely unlikely an income of €900 per month before tax could fund their lifestyle.
Your income and your ability to earn that income is your main asset.
Before one looks at car insurance, home insurance, pet insurance etc, income protection should be number one on the agenda.
It makes no sense that someone would insure their car, home or pet and not insure their income.
In particular, where there is a sole or main earner in the household or where there is a significantly higher salary aligned to one earner.
Fact of life, some of us will get injured or sick, some of us won’t.
The foundation stone of a financial plan is risk management.
Managing risk and putting steps in place to absorb any financial shocks.
And there is no bigger financial shock than your monthly income reducing to €900 per month.
How We Help
In short, we can review your income protection requirements with you.
Importantly, we will go into depth.
Factor in your current assets and any employer sick pay.
Finally, we then make our recommendations and implement them.
As a result, you have in place, the base of a financial plan in as cost efficient a manner as possible.
Get income protection insurance.
Get in touch
Do you have an existing income protection policy in place you would like to review?
Or would you like to discuss your need for income protection or get a handle on your shortfall of cover?
Email us at info@fortitudefp.ie or request a callback.
Alternatively, you can get us on 086 0080 756 or access our diary here and book a call at your convenience.
Why not visit our insights.
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Our blog posts are intended for information purposes only and should not be interpreted as financial advice.
You should always engage the services of a fully qualified financial planner before entering any financial contract.
To discuss engaging the services of Fortitude Financial Planning please email us at info@fortitudefp.ie.
Fortitude Financial Planning Ltd will not be held responsible for any actions taken as a result of reading these blog posts.
*Source: Irish Cancer Society
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