Specialist
Insurance. Something that we would prefer not to have to pay for. The law says we have to have car insurance. The terms of our mortgage says we have to have house insurance and mortgage protection for our home.
But when no one tells us we have to have insurance on ourselves, we avoid it, thinking it won’t happen to us and we won’t need it. And the thing is, it probably won’t. But what if it does? What will be the financial impact of not being able to work, dying young or getting cancer? These are financially catastrophic events as well as the emotional toll they bring. So when do you need to insure yourself and what kind of insurance do you need?
When you start work – Income protection
Your salary is your main source of income and wealth. It is how you will pay your bills, your mortgage, how you will be able to go out, buy clothes. It is from your salary that you will save money, invest and grow your wealth. What happens if that ability to earn an income is taken away from you?
If you are on long term Invalidity Pension from the State, you will receive €11,726. For most people, this is a fraction of what they need and is not enough to cover their basic bills.
Income protection is insuring your salary so if you are unable to work due to any accident, illness or injury. It is paid until you either return to work or you reach retirement age.
Given the potential length and cost of a pay out, income protection is more expensive than other risk benefits but you do get tax relief on the cost (payouts are taxed as income). The younger you are when you take it out, the cheaper it is.
Take this cover out when you start working, it is relatively cheap at that stage. Protecting your income is the most important thing to you.
Having a family – Life cover
I am going to adopt a broad interpretation of the term “having a family” and not just restrict it to having kids. If you are a one income couple, you need to take out cover on the working person’s life. Even if the non working spouse may work if they were widowed, their earning capacity may not be capable of funding the lifestyle you live.
If you are a couple that are renting and saving for a deposit, it is useful to take out life cover just in case there is a premature death. This cover can be used for mortgage protection when you do get your home (ensure the amount of cover and term is long enough).
Premature death is a traumatic event and the surviving spouse will grieve for a long time. Having a cash buffer allows them to take time off work, be able to have some retail therapy or do some travel, so even having it when there are no children is a good use of money for a couple.
But taking out cover when there are children is an essential. You are responsible for the upbringing of someone else and children are expensive. There is decades of their expenditure to pay for, you shouldn’t leave the surviving spouse as solely responsible. Even if your spouse is a high earner, will they be able to carry on at the current capacity if they have to raise children themselves? Or will you need a full time child minder to look after them and bring them to all their activities.
You need the most cover when your children are young and very dependent, your savings are low and there are decades of earnings ahead of you. You don’t need an indexed linked life cover plan that will pay out millions if your die in your late 50’s, when you children are grown up and have accumulated a large pension fund. That is why reducing cover a.k.a. mortgage protection is great cover. The costs are lower and you have a large lump sum when you need it and it reduces as your savings increase. For example, €1,000,000 in mortgage protection cover for two 35 year olds over 25 years on a dual basis (it can pay out twice) is €85 a month. Level term where the cover will stay at €1,000,000 for 25 years is €131 a month. That’s a difference of €13,800 over the lifetime of the policy. If you indexed linked the cover, the final monthly cost will be €394 and you will have €2.09 million in cover at age 60!
Taking on debt – Specified Illness cover
For me, this is the least important of the three. Where income protection will pay an ongoing income if you are unable to work, specified illness pays a once off lump sum if you get one of the illnesses on the insurer’s list of covered illnesses. You do not have to be unable to work and the lump sum payment is tax free.
Where I do find it useful is when people take on debt. If you insure 4-5 years repayments with specified illness, it can take some of the financial pressure off you if you get cancer, heart attack or stroke (the big three for claims) or one of the other illnesses covered. You should not add it to your mortgage protection plan though. These plans are assigned to the bank, so if there is a claim, the money is paid to the bank first. You want the money paid out to you so you can decide what to do with it. You may have credit card debt or a personal loan that you would prefer to pay off first.
It is also important to incorporate life cover into your specified illness plan. If you get one of the illnesses but do not survive 14 days, the plan doesn’t pay out. If you incorporate life cover into the plan (called accelerated cover), the life cover element will pay out. The life cover will also pay out if you die prematurely from something that isn’t on the list of illnesses. The additional cost is negligible and in some cases cheaper to incorporate it.
Risk benefits are something that are important but rarely urgent. And when it becomes urgent, it is too late.
By Steven Barrett Bluewater Financial Planning