Take cover: How to protect your income

For the month of January, I am asking experts for advice on how to tackle major financial resolutions.

This week, I spoke to Nick McGowan, an independent life insurance expert with LION.ie about how to protect family finances and why it is so important.

First things first, what should be the priority for a family who currently have no cover (or nothing beyond the minimum required for the mortgage)?

“Without a doubt, their priority should be income protection / disability insurance,” Mr McGowan says.

“For families, the impact of illness or disability on income can be devastating.

“The maximum State illness benefit is just €203 per week, imagine trying to survive on that? It might just cover the mortgage.

“Income protection will pay you up to 75% of your income if you’re unable to do your job due to any illness and will continue to pay out until you get back to work.”

Mr McGowan said this should take preference even above sorting out life assurance

“Unless of course, you have it at work,” he adds. “Give Helen in HR a call — fingers crossed, you’ll be surprised to hear your generous employee already offers IP.

“Income protection is the foundation on any solid financial plan, you can then build life insurance, savings, pension etc on top of it. Without an income, you won’t be able to save or contribute to your pension. Everything stops.

“The question I always ask if ‘imagine you had a money machine in your kitchen printing thousands of euro every month. Would you insure it?’ “Of course, you would. You are that money machine, and income protection insures your ability to keep on printing money.”

So if you already have income protection and are moving on to life cover, what are the basic things to look for?

“To calculate an exact amount speak with an advisor but to get a general idea my rule of thumb is to multiply 2/3 of your salary by the number of years until your youngest is 25,” Mr McGowan suggests.

“So say you earn 60k and your youngest is 3. That’s roughly 40k x 22 = €880,000 cover required over a 22 year term.

This protects your youngest until they are 25 and financially independent.”

If you have a mortgage protection policy already, you can reduce this further as the mortgage will be cleared freeing up the mortgage repayments.

Mr McGowan has one further suggestion when it comes to life cover: “Make sure you add the conversion option which allows you to extend the cover in the future even if you suffer ill health.”

I then asked about serious illness cover, which Mr McGowan said can be of benefit in some circumstances but needs to be carefully read and understood.

“Serious illness cover is an option for people who can’t get income protection due to their occupation (high-risk occupations may struggle to get income protection cover),” he says.

“It pays out should you get a specific illness as defined by your policy so make sure to check the terms and conditions before signing up.

“Unlike income protection, you can’t claim if you’re unable to work due to mental health issues or back pain.”

While I was asking about people who need to sign up for these products, Mr McGowan says those who already have cover should not get complacent.

“Check you’re not getting ripped off on your current policies,” he says. “There are huge discounts available at brokers that aren’t open to banks or direct at the insurers.

“If you bought your cover from the bank or direct, you could be paying through the nose.”

You can get advice from any independent broker or use Mr McGowan’s website LION.ie to compare the market.