We go through an overview of Income Protection, how it works and you can maximise the value as a Limited Company Contractor.
What is Income Protection:
Income protection provides you with a regular income, which is paid out if you cannot work due to medium or long-term illness or injury. It is designed to supplement some of your earned income if, due to illness or injury, you cannot earn an income yourself.
Income protection is available to those in full-time employment or the self-employed. It protects you if you are out of work for long periods due to illness or disability; it does not cover you in the event of being made redundant. To qualify for income protection cover you must typically work at least 16 hours per week. Some occupations are not covered for income protection and if you have a significant medical condition you may not be able to get income protection cover.
In order to ensure you have a financial incentive to return to work, income protection cover is usually limited to 75% of your pre-illness earnings, less the single person’s Social Welfare Disability Benefit. You cannot insure 100% of your earned income and high earning restrictions may also apply.
The cover pays out if you are out of work for longer than a period referred to as the “deferred period”, which typically ranges from 8 to 52 weeks. The cover normally pays out this benefit after the deferred period while you continue to meet the conditions of payment, until the earlier of:
- The date the insurer determines you are fit to return to work; in some cases, the insurer may be willing to continue paying a partial benefit for a period if you return to work part time.
- The date you return to work.
- The benefit termination age of the cover, which is usually 60 or 65. This can be earlier in some cases but can be no later than your planned retirement date.
Can I expense through my limited company
Yes. Premiums qualify as allowable business expenses that can be offset against corporation tax.
If I pay it myself can I claim tax relief?
Yes. You can choose to make the contributions via your personal Bank account and can claim tax relief at your marginal rate of PAYE (eg 40%). The tax relief can be applied via payroll by notifying Revenue of the fact you have started such a policy and supplying them with the details of the contributions. Other than that you can choose to claim when submitting your self-assessment tax return in the following tax year.
How do I claim if I get sick?
You start the claims process by contacting the Insurance company who you took the policy out with. They will send you a Claim Form which you will complete and return to them. At this point you should engage with your Financial Advisor as they will have experience in handling claims such as this and will be a vital help to you in the process. Once the claim has been received it is assessed and usually you will be sent for an ‘Independent’ medical with a Specialist in the field. They will submit a report to the Insurer who will then assess the claim.
Once the claim has been accepted you will receive the amount insured (eg €1,000 per week) directly from the Insurance company once the deferred period has elapsed (eg 13 weeks). You will need to register with the Insurer as an ‘employee’ in order to facilitate the appropriate tax deductions and they will provide you with a corresponding payslip. The claim will continue to be paid until:
- You are fit to return to work
- You reach the cessation age on the policy (eg 65)
- You die
In most cases Insurers will facilitate a partial payment to allow claimants who can only return to work on a part-time basis still be able to claim some of their benefit.
How much do I get?
The amount of payment you receive will be determined by the amount of cover you chose to insure when you took out the policy.
Paul is a Company Director earning €90,000 per annum.
He can insure up to 75% of his salary which means the maximum cover he can choose is €67,500 per annum. The next choice is whether to ‘index link’ the policy to protect against inflation. He then needs to choose a ‘deferred period’ on the policy which determines when the claim will begin to be paid. It can be as low as 4 weeks from the 1st day he is absent from work due to illness/injury or 13 weeks, 26 weeks or a maximum of 52 weeks after that 1st day. The final choice is the ‘Ceasing Age’ for when the claim will cease to be paid. This is typically age 65 but he can choose as low as age 55 and as high as age 70 with some insurers.
Paul chose to cover €52,000 per annum (€1,000 per week), index linked, with a deferred period of 13 weeks ceasing at age 65.
Paul badly injures his back whilst out cycling with his friends. He is now unable to work and the next working day is the 1st May. He is entitled to claim €1,000 per week, index linked, from the 1st August. The claim will be paid until Paul is fit to return to work, reaches age 65 or dies.
Paul discovered a lump which turned out to be cancer, His doctors certified him as unfit for work at the 31st of August 2017 and he started treatment on 1st September 2017.
As Paul had a 13 week deferred period, he started to receive his first payment from the insurance company during the week after the 1st of December 2017.
Paul spent several months in treatment, and thankfully made a full recovery towards the end of 2018. His doctors certified him fit for work from 1st February 2019. During this time he claimed over €60,000 in income protection payments.
Contact our Contaractor Wealth Management Partner
Ph: 01 2966120