Protecting your ability to work
If you become unable to work at 30, you often lose over a million euros of future income. The state only covers a small part of that. Income protection insurance closes the gap if you take it out early and answer honestly.
Most people think of wealth as their bank account and portfolio. For people in work, though, the biggest asset is usually something else: the ability to earn money over the coming decades.
Sophie is 30 and earns 2,500 euros a month after tax. There are 37 years until retirement, together over 1.1 million euros, without a single pay rise. If an illness stops her from working, that money is gone. No portfolio a 30 year old has built can make up for it.
What the state pays
In Germany there's a reduced earning capacity pension. You only get the full amount if you can't work more than three hours a day in any job at all, not just your own. And it's usually far below your previous take home pay. Young people who have only paid in for a few years often get especially little. Other European countries have similar benefits, with very different rules and amounts.
How the insurance works
Disability or income protection insurance pays you a monthly income if, for health reasons, you're expected to be unable to do at least 50 percent of your last job for at least six months. It keeps paying until you can work again or the contract ends, ideally at retirement age. That's how the German version works, and many other countries have comparable products.
The most common causes aren't accidents, by the way. Mental health problems come first, followed by back and joint conditions and cancer.
What to look for when signing up
- Start early. The premium depends heavily on age and health. It's lowest in your mid twenties with no previous conditions.
- Answer the health questions honestly. Get your medical records from doctors and your health insurer first. If you leave something out, the insurer may refuse to pay when it matters.
- Agree a sufficient benefit. It should cover your fixed costs. For many people that's 1,000 to 2,000 euros a month.
- Cover until retirement. A policy that ends at 55 leaves you alone in the years when the risk is highest.
The premium depends a lot on your job. An office worker often pays far less than a roofer. If you work in a physically demanding job or already have health conditions, you may only get surcharges, exclusions or a refusal. Then it's worth looking at alternatives that pay out under stricter conditions but are easier to get.
Because a lot of money and a lot of small print are involved, independent fee based advice is worth it here, for example from a consumer advice centre. Nobody there earns from you signing.
In German contracts, look for a waiver of what is called abstract referral. Without it, the insurer can point you to another job you could theoretically still do, even if you never trained for it. Good policies waive this. A concrete referral usually remains allowed, meaning when you actually already work in another, comparable job.
If you breach your duty to answer all health questions correctly when you sign, the insurer can withdraw from the contract, contest it or adjust it. In Germany this is set out from § 19 of the Insurance Contract Act. For negligence it applies up to five years after signing, for fraud up to ten years. That's why your medical records matter so much before you apply. Some advice services also make an anonymous risk enquiry with several insurers before you apply anywhere under your name.
A guaranteed increase option lets you raise the benefit later without a new health check, for example after marriage, having a child or a higher salary. Indexation raises premium and benefit a little every year so inflation doesn't eat the agreed income.
In Switzerland the state disability insurance and the occupational pension fund already cover part of the risk, and private cover fills the gap. Austria has its own occupational and general disability pensions. In many countries employers also offer group cover. So first check what you already have.
Summary
- Your ability to earn is usually worth more than everything you've saved so far.
- The state pays little if you can't work, and under strict conditions.
- Start early, answer health questions honestly, cover until retirement.
- Independent fee based advice is especially worth it here.
Did you get it?
Why is the ability to work so valuable for people in work?
Because the income of the coming decades often adds up to over a million euros, more than any savings built so far.
When does income protection insurance usually pay?
When you're expected to be unable to do at least 50 percent of your last job for at least six months.
Why should you request your medical records before applying?
So you answer the health questions completely and correctly. Otherwise the insurer may refuse to pay when it matters.
What does a waiver of abstract referral mean?
The insurer can't point you to another job that you could only theoretically do.
Sources and further reading
- Deutsche Rentenversicherung, reduced earning capacity pension (German). View source ↗
- German Insurance Contract Act, §§ 19 to 22 and §§ 172 to 177 (German). View source ↗
- EIOPA, consumer protection information. View source ↗
- AHV/IV information office, Swiss disability insurance. View source ↗
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