Your most precious asset is not your home, your business, your investments, your car, your boat or any other tangible goods you may be able to think of. The most precious thing you have is your ability to work so that you can generate the money that will allow you to acquire all the above.
What would happen if a serious illness or accident robbed you of that valuable ability? How long could you pay your debts without a monthly salary from your job?
For most people the answer is “not long” at all.
With disability insurance, you can safeguard your income if illness or accident mean you’re not able to work for a certain period, or even for the rest of your life. This will allow you to meet your financial obligations, cover your living costs and any health costs without placing a financial burden on your family and without significantly lowering your standard of living.
The first, normal, spontaneous reaction most people have when asked about incapacity or disability is “I don’t think that’s likely to happen to me”. That is based on the erroneous impression that incapacity for work (whether temporary or permanent) usually arises after a serious accident and its consequences have to do with mobility problems (such as paraplegia or quadriplegia). However, in reality 90% of such cases are caused by diseases such as cardiovascular disease, cancer, multiple sclerosis and other chronic conditions.
So to give it a simpler name, “income protection insurance” is a strong ‘financial ally’ in cases of unforeseen health conditions for any worker, employee or self-employed person no matter their age or family status, whether married or unmarried, or whether they have children or not.
Under a disability insurance policy you specify the amount you want to collect from the insurance company to make up for your income if you cannot work due to illness or accident. That amount is a percentage of your monthly income; typically it is anything up to 70%. The length of time the amount is paid may range from a few weeks or months if the incapacity for work is temporary, or up to the age of 65 if the incapacity means you can never return to work. The money can be paid monthly, or lump sum in the case of permanent disability.
If you rely on your job to meet your living expenses then the simple answer is yes. One thing you need to bear in mind is that in cases of incapacity for work, living expenses usually go up. That’s because in addition to your regular financial outgoings that need to be met, there are also unforeseeable costs associated with incapacity for work such as medical fees, the cost of medicines and examinations, the cost of adapting the layout of your home in case of mobility problems, the cost of hiring someone to help you and your family at home, to mention just a few.
Employees with children
One of the most beautiful chapters in people’s lives, starting a family, comes with dreams and plans about your children’s future. Every parent wants to provide the very best to their children, to see them grow up in a prosperous, love-filled environment. Income protection insurance is the ideal way to ensure the family’s financial prosperity in the event of one parent having to stop work due to temporary or permanent incapacity for work. Having secured the capital needed to cope with incapacity for work, you and your family can meet current and future financial obligations.
Income protection insurance is a ‘promise’ to your loved ones that the dreams you made together will materialise no matter what happens to you.
Employees without children
Disability insurance is relevant to anyone who works even if he or she has no children or financial dependants. Safeguarding your personal income if there’s an illness or accident allows you to continue to live in dignity and to maintain the standard of living you were used to without becoming a financial burden on your family members.
Self-employed persons and SME owners
If you’re self-employed or run your own business, then disability insurance surely must ranked high among your insurance priorities. Your income, as a self-employed person, is closely bound up with your ability to work, and in fact can be dramatically reduced if you miss even a few days of work.
If you’re the owner of a SME, cover of this type is considered essential. As a business owner, you need to bear in mind that if you cannot work, you need to ensure that your business is protected so that it continues to operate without problems and provides your family and employees with income. Specifically, that presupposes that all fixed outgoings (loans, payrolling costs, suppliers) can be paid even if you’re not working.
Disability insurance can be the ideal “business partner” to make up for the income that at some point you may not be able to generate.
If your regular outgoings include paying loan or credit card instalments, you need to seriously consider how they will be paid if you stop working and therefore stop generating income. Disability insurance can be used to pay off your bank debts so that you don’t need to financially burden members of your family or have your assets seized if you can’t pay the debts.
With temporary incapacity for work, the monthly income top-up you’ll need depends on how much you earn a month and what monthly inelastic outgoings you need to cover (such as rent, loans, bills, alimony/maintenance money and tuition fees for your children).
However, with permanent incapacity for work, the level of capital you will need is determined by calculating the expenses you will need to meet your living costs from your current age to retirement age. So, for example, if you’re 40 years old today and your minimum annual outgoings are € 20,000, by the age of 65 you will need to spend € 20,000 x 25 years = € 500,000. You would gradually build up that capital by working and then use it over time to pay your regular outgoings. How will that capital be met if you are not able to work and therefore generate it?
The two main types of disability insurance cover temporary and permanent incapacity for work.
In the case of temporary incapacity for work, you may be absent from work for a few weeks or a few months. During that period the insurance company compensates you each month for the amount specified in the contract. In that way your regular monthly outgoings are paid without your financial planning being impacted. Depending on your profession and the cost you are willing to assume, the monthly compensation can begin to be paid relatively immediately after you become absent from (such as from day one in the case of an accident) or can start after one month has elapsed for example.
In the case of permanent incapacity for work, you will not work for the rest of your life. Normally permanent incapacity for work follows on from some form of temporary incapacity for work. Contracts covering permanent incapacity for work can pay you monthly compensation up to the age of 65 or a lump-sum capital, or some combination of those two options.
An alternative form of insurance for temporary or permanent incapacity for work is critical illness insurance. A critical illness diagnosis such as cancer or multiple sclerosis can significantly affect your ability to work and consequently earn a living. Using Critical Illness Insurance, you have an insured capital at your disposal which becomes available if a critical illness is diagnosed. Critical Illness Insurance operates independently or in combination with the temporary and permanent disability insurance, offering more rounded and comprehensive cover.
People often put off the decision to take out disability insurance either because they do not know what it covers, or because they it’s not relevant to them or because they think it’s expensive. However, once you understand the importance of this type of cover and the major likelihood that any of us could experience incapacity for work at some point in our lives, the only factor that remains to be determined is cost. In reality, such insurance can have quite a low cost and can be fully tailored to match your financial situation as the insured. Key factors affecting cost are the level of capital you want, the duration of insurance, your age and your state of health.
Let’s look at an example
If you’re 35 years old and want to secure capital in the event of incapacity for work of € 100,000 up to the age of 65, the cost can start from as little as € 9 a month.