FINANCE & MANAGEMENT
Income Protection – better than a
punch in the mouth
BY
Justin O’Gorman
Income Protection – better
than a punch in the mouth
Justin O’Gorman provides an insightful article on the importance of
Income Protection.
Justin O’Gorman is Director
of Financial Services at
JDM Financial Services.
He is a Qualified Financial
Adviser and has worked
in the financial services
industry since 1988 in
a variety of roles across
the Retail Banking,
Bank Assurance and
Brokerage markets.
“But little Mouse, you are not alone,
In proving foresight may be vain:
The best laid schemes of Mice and Men
Go often askew,
And leave us nothing but grief and pain,
For promised joy!
– Robert Burns, 1785
Legend has it that Burns was inspired to
write the poem “To a Mouse, on Turning
Her Up in Her Nest with the Plough” after
destroying a mouse’s winter nest while
ploughing the fields. Burns’ brother even
claimed he wrote the poem – all 8 verses while still holding his plough.
The above verse is verse 7 and the line
“the best laid schemes of Mice and Men”
has morphed over time into “the best laid
plans of Mice and Men” and has come to
represent the fact that no matter how well
something is planned, things can and do
go awry.
A more modern interpretation of this quote
could be attributed to Mike Tyson when he
famously said “everyone has a plan until
they get punched in the mouth”.
So, what has the above got to do with the
subject matter of this article?
Well, to one degree or another, we all have
plans be they of the small and personal type
or of the large and taking over the world
type. They may be as simple as planning
next year’s 2-week holiday in sunny Spain
or as complex as ensuring sufficient access
to funds to expand one’s business beyond
its present boundaries into new territories
through organic growth or the purchase of
other businesses along the way.
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90 YEARS OF CPA
Whatever the plan, they all have one thing
in common – the person making the plan.
Most plans don’t come together over night.
They take time and patience in order to
reach fruition. They invariably also need
money which is usually generated by way
of an ongoing income that the person earns.
And while this ongoing income is the seed
capital for those future plans, it also pays
the bills hat need to be serviced on a day to
day basis – mortgage and loan repayments,
food, utility bills, education, insurance etc.
Now, having been around the block a few
times over the last few years, I know that
most people have an extremely positive
view of their futures. Whether we are
inherently wired to look on life from an
optimistic perspective or we tend to
discount those things that can go wrong,
we always assume that nothing bad will
ever happen to us. Bad things happen to
others but not to us. And statistically, that
probably is correct.
However, we are hotwired with a need to
protect our loved ones from danger and
this manifests itself in a number of ways
such as purchasing cars with greater levels
of safety equipment, having alarms on our
property, child-proofing our homes and
for a lot of people, buying Life Assurance
or Serious Illness Protection to protect the
family from the financial consequences of a
pre-mature death or critical illness.
As we slap ourselves on the back and
mentally tick off another item on our to
do list, one area that is often ignored is
protecting our income. When you think
about it, we protect our cars, our homes,
our phones(!), our holidays and ourselves
against the big ticket events but never
consider protecting the one thing that pays
for it all – our incomes.
ACCOUNTANCY PLUS. ISSUE 04. DECEMBER 2016
FINANCE & MANAGEMENT
BY
Income Protection – better than a punch in the mouth
Justin O’Gorman
I’m sure every single one of you reading
this article can imagine what your lifestyle
would be like if you lost your job or you
went out of business. The consequences
on your everyday life would be substantial
from a financial perspective. Now imagine
your income disappears because of
sickness or injury. Would the consequences
be just as bad or even worse? I’ll let that
sink in for a minute.
One of the reasons for the lower uptake on
Income Protection is the mistaken belief
that our employer and/or the State will
look after us. Under present legislation,
there is no obligation on any employer to
pay sick pay to an employee if he/she is
out of work due to illness or injury. Some
employers may cover a specific number
of days but it certainly won’t be unlimited.
And the payment from the State isn’t that
generous at €9,776 per annum. And, by the
way, if you’re self-employed, this €9,776
isn’t available to you so self-employed
individuals are in an even more vulnerable
positon.
What’s the solution?
You can protect against this vulnerability
in one’s financial plans with an Income
Protection policy.
length of time. For example, let’s say your
employer pays you for 6 months, you could
choose to have a policy with a 26-week
deferral period.
One advantage an Income Protection policy
has over the traditional Life and Critical
Illness policies is the fact that the premium
is tax deductible at one’s marginal tax rate.
Therefore, for a higher tax payer, a €50
per month Income Protection policy has
a net cost of €30 per month. I do need to
point out that the benefit from an Income
Protection policy will be taxed if you ever
receive same. However, the applicable tax
at that time will be based on your income
at that time and not your pre-claim level of
income.
Factors that influence the monthly
premium include the level of cover required,
the deferral period chosen, one’s smoker
status, one’s age and the cessation age of
the policy. Another factor that comes into
play is one’s occupation. Occupations are
classed from 1 to 4 and reflect the nature
of the role. So for example, a retail worker
would be a 2 and a mechanic would be a
4. A general rule of thumb would be the
less physical one’s occupation, the lower
the cost of the cover. You’ll be delighted to
know that accountants are ranked as a 1!
As an example, a 34-year-old non-smoking
Accountant could have cover of €40,000 per
annum to age 65 with a 13-week deferral
period for a gross premium of €99.45 per
month. After tax relief @ 40%, this works
out at €59.67 per month.
Conclusion
Let’s go back to our mouse at the start of
this article. It had diligently prepared for
the upcoming winter by making a home
for itself and its family in a burrow under
the ground. It was ready to settle down
and wait the arrival of spring. Then along
comes a Scotsman with a plough and in
that instant, the mouse’s world and all her
carefully laid plans were blindsided by the
proverbial punch in the mouth.
As part of our personal planning process,
it is important that we take the necessary
steps to be able to weather a similar
situation.
An Income Protection Policy is designed to
pay an ongoing income to the life assured
in the event that he/she is unable to work
due to illness or injury. The benefit will
start after a deferral period has passed and
will continue to be paid until such time as
the life assured returns to work, reaches
the cessation age of the policy or dies. The
maximum benefit that can be insured for
is 75% of one’s annual gross salary minus
the State disability payment of €9,776. This
€9,776 is not taken into consideration for
self-employed individuals.
The deferral period is the length of time
that needs to pass between the life
assured being unable to work and the
Income Protection benefit starting. This
deferral period can be 4, 8, 13, 26 or 52
weeks. If it is a case that your employer
does pay a benefit for a duration of time
after not being able to work, you can use
a deferral period that coincides with this
ACCOUNTANCY PLUS. ISSUE 04. DECEMBER 2016
90 YEARS OF CPA
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