Protect your human capital

Asked to name their biggest asset, many people would instinctively reply that this is your home, or perhaps your business. In fact, your biggest asset is your ability to earn income month after month, year after year. We refer to this as “Human Capital”. Consider a 45-year-old earning €100,000 with a retirement age of 65, this would equate to €2 million in Human Capital, before any salary increases.

We protect plenty of things in our life through insurance, from property insurance to travel insurance, through to health insurance and life insurance. But this ability to earn and increase our wealth can also be insured. This is called Income Protection.

Income Protection is a type of insurance cover that pays you a fixed amount per month in the event of you being unable to work for a specified period of time due to any injury, illness, or disability. Up to 75% of your income can be insured. Income Protection is designed to protect against long term disability, so you need to satisfy a waiting period before a claim becomes payable (this is called a “deferred period”and can range from 4 to 52 weeks, depending on how cover is set up).

Once a claim has been made and commences payment, the payments will continue until you go back to work, until you retire, or until you die – whichever comes first.

1 out of 6 Irish people will be unable to work for at least 6 months due to injury, illness or disability, yet only a minority of people have Income Protection.

Income Protection can be set up on an individually paid basis, attracting Income Tax relief of up to 40%, or it can be paid by a company for the benefit of its owners or staff, with Corporation Tax relief and no Benefit in Kind implications.

It is also very cost effective.  The after-tax cost of €60,000 of cover (€5,000 per month) is €85.88 per month *

We would always recommend that your individual circumstances be taken into account to decide the correct structure for you when taking out Income Protection. For instance, we would recommend that clients consider specified illness cover (which pays a one off lump sum on diagnosis of a specified illness such as cancer, stroke, heart attack etc) until such a time as an emergency fund has been established of 6-12 months net living expenses. This will then instruct the most suitable deferred period on your Income Protection policy.

Income Protection is essential for almost everyone with an earned income, in particular the self-employed. It should also be noted that not all civil servants have Income Protection, so it is worth asking your employer what your personal arrangements are.

As with all aspects of financial planning, individual advice is key. Please contact me at rossdevlin@pfp.ie if you would like more information, or to discuss further.

Ross Devlin

Financial Advisor

PFP Financial Services

*Assumes Male, Age 45, Non-Smoker. administrative roles. Indexation applies. No escalation. Reviewable Cover. 52-week deferred period. Tax relief at 40%.

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