How much life cover do you need?

Tue, Sep 4, 2012, 01:00

Life insurance is one of those key issues some people prefer to dodge, but for many it is well worth considering what will happen to those closest to them in the event of their death

IT’S NOT something most of us like to think very much about, but given that it’s one of the few certainties in life – apart perhaps from the lack of a summer in Ireland – preparing for your own death is worth due consideration.

A recent survey revealed while 50 per cent of people were aware of how much money their family would need to survive on in the event of their untimely demise, very few had sufficient cover in place.

Who needs life cover?

Anyone who has dependents typically needs life protection to ensure they are financially cared for in case of an untimely death. But as John Geraghty, chief executive of LA Brokers, notes, “If you’re young, free and single, you don’t need it.” Similarly, older couples are unlikely to require such protection.

If such a case applies to you, remember not to overlook the financial input of a stay-at-home parent. While such parents might not bring in an income, without them, their childcare and housekeeping duties for example might need to be taken over by a paid employee. So this is a consideration to bear in mind.

How much cover is optimal?

While this question might be akin to “how long is a piece of string?”, financial advisers do come up with a guide. Typically, between 10 and 15 times your current annual income is needed to maintain current lifestyle. So, in the case of a family with one income of €80,000, should that person die, the family would need to be able to access a fund of about €800,000-€1.2 million. If this seems like a lot, it’s because it is.

According to Daragh Feely, sales manager at Caledonian Life, very few people have this level of life cover in place.

“We know that the average life assurance cover policy is actually under €300,000, which is only seven times the average industrial wage, or for example, for an accountant earning €70,000, that level of cover is only four times their annual income,” he says, noting there is a “clear disconnect” between what people actually have in place and what they think they should have.

As Feely points out, if your family needs €4,000 a month to live on, then €300,000 worth of cover would only last for a bit more than six years.

Irish Life has a useful online calculator at iti.ms/NLAWnOto help you determine the amount of cover you might need, while you can also discuss this with your financial advisers.

What’s the difference between the various types of life insurance available?

In short, the cheaper the product, the less cover it offers. So for example, if you are in the market for a house, your lender will likely require you to have mortgage protection at the minimum. With this policy, should you die with an outstanding loan on your home, your mortgage will be cleared. The advantage is that it gives you peace of mind, but the disadvantage is that it declines in line with your mortgage – so even though you initially received protection for your total mortgage, 20 years down the line this will have reduced significantly. In addition, if you move home after 10 years, and are 10 years older at the time, you might find getting a new policy has become more expensive.

With term life insurance, your cover is not limited to the size of your mortgage. So, if for example you take out a policy to cover a mortgage of €350,000, should you die when the outstanding mortgage has fallen back to €200,000, your estate will still be entitled to the full amount. With such a policy you can also carry it across to a new property, which means you would not have to be reassessed and it might work out cheaper in the long-term.

A conversion option on the policy guarantees you can purchase additional protection in future without having to provide evidence of good health. However, as Geraghty notes, this will cost you up to 8-10 per cent extra.

As the name suggests, the policy runs for a set period, usually terms of five years up to 40 years. Financial advisers typically advise that you take cover out until your youngest child has left school or college.

The most expensive – and most comprehensive – type of cover available is for whole of life. With this product your life is protected until you die, and even if you stop paying into it the policy will not be cancelled – rather the insurance company will reduce your level of cover. However, it’s important to note your insurance provider is likely to increase your premiums over the life of the policy, and while you can opt for fixed premiums, this will be expensive.

According to Geraghty, it’s really only for specific cases such as parents who want to ensure a child with special needs is adequately provided for, and he warns against people being mis-sold this product.

How much will this level of cover cost me?

If you’re in the market for mortgage protection cover, you should budget from upwards of about €15 a month.

For example, €290,000 in cover for someone who is 27 years old, over a 35-year term, will cost €16.66 a month for a male non-smoker with Zurich. For a female non-smoker, the cost goes down to €13.17, while smokers can expect to pay about €10 a month extra.

If you’d rather stick with term life cover, prepare to pay that bit more. According to the itsyoumoney.iewebsite, the cheapest premium available based on the same terms as outlined above is again from Zurich, at €23.62 for a male non-smoker, or €18.44 for a female non-smoker.

What if I can’t afford it?

Before you panic, remember that death-in-service benefits are typical at many employers. For instance, if you work for Google in the US you can expect some spectacular cover. The online giant recently announced that if you die while working for it, your surviving spouse or live-in partner will receive 50 per cent of your salary every year for the subsequent 10 years, while your children will receive $1,000 a month from Google until they reach the age of 19 (or 23 if the child is in full-time education).

Elsewhere, you can expect your spouse to receive about one to three times your final salary should you die while working for an organisation.

Also, if you take steps to improve your health, this might bring your premium down. The premium you are charged is determined by factors such as your age, whether or not you’re a smoker, your gender (females tend to live longer) and the size of the cover required.

Another way of looking to reduce the cost is to opt for a dual or joint policy if two people are applying for cover, as this can help bring down the cost. For example, two smokers looking for term cover of €160,000 over 15 years can expect to pay €138 a month for a joint policy with Caledonian Life, or €147 for a dual policy, as opposed to €154 if they were to pay it individually. A joint policy ends upon the death of one of the insured people – a dual policy on the other hand pays out upon each death.

Are there any exclusions?

While in years past it might have been impossible to get life insurance for someone who previously had a heart attack, insurance companies have moved in tandem with modern medicine. However, if you have a health issue which can limit your life expectancy, insurers will likely apply a loading.

According to Geraghty, this typically starts at about 50 per cent and goes upwards from there. So, if a typical monthly policy cost €50, if you have a health issue that is loaded, your policy will cost upwards of €75 a month.

If your health issues are “pending investigation”, then Geraghty advises that an insurer typically won’t underwrite a policy, which can become problematic if you’re in the market to buy a house. Lenders usually require you to take out a policy to protect the loan, although he notes that in some cases the lender might allow you to waive your right to the property in lieu of life insurance.

If you have a medical condition that you’re worried about, he recommends getting a broker to discuss your case with several life insurance companies before you make a formal application.

Otherwise, if you make one with an insurer which is likely to turn you down, you will have to disclose this refusal on subsequent applications.