Face up to future to protect your family

The recession has brought the dangers of income loss and family protection to the fore

THE FINANCIAL crisis has brought the necessity of planning for the future into sharp focus, but how can you be sure your family will be looked after if the unforeseen should happen?

Death, illness or unemployment can ruin whatever future you have planned and it is important to have your affairs in order and to ensure that you and your family will be adequately looked after.

What are you entitled to?

Your first step in safeguarding your family’s financial future should be to review your current entitlements. This means taking the time to sit down and go through all relevant insurance policies, both personal and work-related, for yourself and your partner, as well as factoring in social welfare contributions.

For example, if you should fall sick, do you know for how long, and what proportion of your salary your employer will keep paying you? And when this ends, how much sick pay will you be entitled to from social welfare?

The current maximum yearly allowance is just €10,192 and, if you are self-employed, you may not realise that you are not entitled to such contributions.

You should also reassess your life cover. If you recently took on extra borrowings or added to your family, you may need to increase it. If you fear redundancy may be a possibility, you should work out what lump sum you might be entitled to. The current statutory rate is just two weeks pay for every year of service, up to a maximum of €600 a week, plus one further week’s pay. While most employers offer more generous terms, this is all you can really bank on.

When considering the impact redundancy would have on your family’s finances, you should also factor in additional benefits which you may receive as part of your terms of employment, such as health insurance cover, income protection and death in service benefit.

Looking into your financial future also means considering whether or not you are adequately provided for on the pension front. Given the generous relief available for those paying tax at the higher rate, you may find that you can significantly increase your monthly contributions without too much pain. That will pay dividends when you retire.

This is particularly relevant when you consider that the Government plans to cut this level of relief at some point in the future.

Get protected

Following a review of your entitlements, you may find that you have significant shortfalls in certain areas, which may necessitate taking out additional insurance policies.

Protecting against a loss in income is likely to be near the top of your agenda and there are several ways of doing this.

Income protection

First up is income protection, an insurance policy which pays out if you lose your income due to an accident or long-term illness. The main thing to note with such a policy is that it offers no protection against redundancy.

Like other types of insurance, you pay a premium each month, which provides you with a replacement income should you find yourself unable to work. The payments continue for as long as you are unable to work because of your illness or disability, or until you die or you reach the age of 55, 60 or 65, depending on the policy.

Premiums are eligible for tax relief, but not all illnesses are covered under every policy – for example, April Insurety’s income protection policy does not pay out in the case of mental illness.

As such, David Quinn, managing director with Investwise, says people need to know what they’re covered for when buying such policies, pointing to the fact that they can come with eight to 10 pages of small print. “It may only be at paying time that you realise what you’re not covered for,” he says.

Moreover, some people may find that they are excluded from taking out such a policy in the first place. Most insurers won’t offer the product to people reliant on manual work, such as construction workers and carpenters, or those who need their hands for their work, such as graphic designers.

Critical illness protection

Another option is to get a critical illness policy, which would pay out a significant tax-free lump-sum, such as €100,000, if you were diagnosed with a serious illness. In addition to illnesses, most policies also offer cover if you can’t live independently.

However, you should note that these policies tend to be more restrictive than their income protection counterparts and only pay out in the case of a number of specified illnesses. You have a better chance of being successful with your claim under an income protection policy. In addition, critical illness pays out a lump-sum, whereas income protection pays you a regular income until you are ready to return to work.

Critical illness policies tend to be more expensive and, in addition, are not eligible for tax relief on premiums, unlike income protection policies.

Mortgage payment protection

If redundancy is your big fear, you might consider mortgage payment protection. This policy pays out if you can no longer afford to make your mortgage payments due to illness, accident or compulsory redundancy.

Investwise’s Quinn points out that, unlike other types of insurance, the big advantage with this type of protection, is that is there is no underwriting associated with these policies, which means that no one is excluded.

However, given that such policies only pay out for a maximum of 12 months – and often up to a maximum of €3,000 a month – you may be better off simply putting some money away in a savings account.

For example, cover from Bank of Ireland currently costs €6.40 per €100 a month. So, if you want to protect a mortgage which costs €2,000, it will cost you €128 a month, or €1,536 a year, which will add a sizeable chunk to the cost of servicing your mortgage.

As redundancy rates rise, such policies have gotten very expensive, with Bank of Ireland’s aforementioned rate recently rising by 34 per cent.

Moreover, it can be difficult to get your claim fulfilled in full, which can reduce the value of such policies. Such policies also won’t cover you if you take voluntary redundancy, while a waiting period may also apply. If you lose your job before this period ends, you won’t be eligible for cover.

A wiser option, therefore, may be to use that monthly contribution to pay down your mortgage if possible, thereby reducing your overall interest bill.

Mortgage protection

Not to be confused with mortgage payment protection, this policy pays off your mortgage directly to your lender if you die. Given that such policies are a prerequisite of most mortgages, it is likely that you will already have appropriate cover.

Insure your life

It’s something most of us don’t like to think about, but ignoring it doesn’t mean either you or your spouse will be protected from a premature death. If you own a house, it is likely that you already have some form of life cover, but is this sufficient? And, while you may already have life cover such as death-in-service benefit, which would offer your next of kin a multiple of your annual salary, you might just want to top this up with an additional policy.

As previously mentioned, a mortgage protection policy pays off your mortgage directly to your lender if you die, which means that there will be no risk of your family losing the family home in the event of your death. However, such a policy only pays off what is left on the mortgage – whether it be €10,000 or €1 million – which means there will be no extra cash left over for the family.

As such, you may need extra protection. While more expensive than mortgage protection policies, term life assurance policies pay out a fixed lump sum if you should die within the term of the policy. Such policies can be taken out on a dual or joint life basis, as well as a standard single life policy. They also generally pay out early in the case of terminal illnesses, which can help with the cost of medical bills and getting your affairs in order.

How much life assurance you need is a question only you can answer. “It’s a very personal decision, but it should be enough to completely pay off any debts,” says Quinn, adding: “It’s about maintaining the family’s lifestyle after someone dies.”

A 40-year old non-smoking man can expect to pay about €26 a month for insurance worth €210,000 over a 15-year term. Mortgage protection cover, on the other hand, will cost less than €20 a month. Most expensive of all is whole-of-life cover, which pays out a lump sum whenever you should die as there is no set policy term.

To start you off, Aviva is currently running a New Parent Free Life Cover offer, which provides €10,000 worth of free life cover for all new parents up until their child’s first birthday.

Get saving

One way of easing the late-night sweats, which crop up every time you think about losing your job or suffering a further loss in income, is to to build up a substantial rainy-day fund. It’s easy to say, “Oh I’ll start it after Christmas” or the summer holidays, but the longer you leave it, the harder it will be to get saving.

While it’s all well and good to have various insurance policies protecting you against myriad eventualities, as discussed, these may not always pay out. You can’t underestimate the importance of having a rainy-day fund.

According to Investwise’s Quinn, before you even think about investing money, you should have six months of income saved in a reasonably liquid form which you can get access to within a couple of weeks.

So, how much do you need to save? Well, if your average monthly outgoings come to about €3,000, when you add up the cost of your mortgage, car loan, insurance, bills etc, you will need a lump-sum of at least €18,000 to cover you for six months.

If you are starting from scratch and can only afford to save €200 a month, it will take you almost seven years to get the desired amount, so start forgoing those pricey meals out and get saving.

AIB is currently offering 5 per cent on monthly savings of up to €200, while larger amounts will do better at EBS. Although the building society recently cut its rate back to 4 per cent, it will still pay this on amounts of between €100 and €1,000.

If you already have a rainy-day fund and are looking for a home for it rather than the current account in which it is languishing, you could consider putting it into an easy access deposit account. Nationwide UK (Ireland) offers 3.3 per cent variable, or 3.35 per cent fixed for 12 months, while both Halifax and Irish Nationwide offers 3.75 per cent on their flexible savings accounts.

However, the Halifax rate only applies to the first €10,000 while Irish Nationwide will pay it on savings of up to €20,000.

Write a will

While you may feel that writing a will is only for the rich, it is actually vital for everyone, as it will make tidying up your affairs much easier for the family you leave behind. If you should die without a will, or intestate, the law determines how your estate will be divided up. As such, your spouse would receive two-thirds of your estate, with the remainder going to the children. If there are no children, then your spouse would inherit the whole estate.

However, this may be more complicated, given the shape of modern families, which is where a will can become particularly important. If both members of a couple die intestate, the administration of the estate passes on to the nearest relative, which may not be your preferred choice.

As Brian O’Reilly, senior partner of BP O’Reilly, points out, by drawing up a will “you get control over who gets what”.

Moreover, the presence of a will speeds up the division and granting of ownership of an estate and, as O’Reilly says, “it is far more cost-effective to wind up an estate with a will”.

“If you have a will it is relatively straightforward; if you don’t there are always complications. It should be done. Then you can forget about it and get on with life,” he says.

If, like so many Irish people, you have a foreign property, this will also need to be considered when drawing up your will.

Depending on the country in which it is located, it may be necessary to get an additional will drawn up locally.

For example, under Spanish law, you will also need a Spanish will to govern the disposal of your Spanish property. O’Reilly adds that a strange anomaly exists which may mean that your estate could be dominated by your Spanish will.

Given the potential for complications, he recommends that you use a local lawyer to draw up your foreign will.

If you have been put off writing a will because of the cost, this shouldn’t be a concern as it is not prohibitive. O’Reilly suggests that an ordinary will should cost about €250, rising to €350 for a trust will.

This is needed if you have children under the age of 18, as they can’t inherit and such a will would outline the trust, as well as assigning guardianship of the infant children. Remember that both partners will need separate wills.