None of us is getting out of here alive, that’s a fact. Untimely death, serious illness and disability happen too. When things are rosy, things like life, serious illness and mortgage protection insurance seem a bore. But if the worst happens, the right policy will keep a roof over heads and bills paid.
Life insurance, critical illness and income protection insurance are what financial planner Daniel Hardiman calls "insuring the golden goose".
“So many people prioritise insuring the golden eggs – [things] such as your phone, house, cars, pets and holidays.” But without you, the income-generating goose, you can forget about everything else.
Don’t bet the house
The first brush with protection policies for many of us is when applying for a mortgage. By law, lenders (in most cases) require mortgage protection cover. this is a form of life policy that is put in place to ensure that your mortgage is paid off if you die. The policy will have the same term as the mortgage. If you die, the money gets paid to your lender to clear your mortgage. If you don't, normally there will be no cash benefit to you. These policies are priced so that cover declines with your mortgage over its term.
House hunters in a hurry can treat a life policy as a mortgage tick box. They buy the one that their lender offers, without shopping around and giving scant attention to the terms. A policy sold by your lender will pretty much always mean you paying over the odds.
“By taking out mortgage protection with your bank, you are missing out on discounts available from brokers that could reduce your premium by 20 per cent for the life of the mortgage,” says Hardiman.
For married applicants, mortgage protection from banks is often on a joint-life basis, says Hardiman. This means the payout will occur on the death of the first life insured with no further cover for the surviving spouse. By choosing a dual life policy however, life insurance continues for the surviving spouse.
In both cases, the mortgage is paid off on the death of the first spouse.
“In effect you are getting double cover which can be sourced at a lower price than a joint policy from your mortgage provider,” he says.
But Covid-19 is making actuaries nervous, and prospective mortgage applicants need to beware. Some would-be homeowners can't get the mortgage protection they need to get a loan, says Lorraine Cooke of broker Jigsaw Financial Solutions.
“Where somebody has contracted Covid and they have recovered, they are being postponed cover for six months by insurance companies,” says Cooke. “If someone hasn’t contracted Covid but has an underlying condition like diabetes, they are postponing them too.”
And six months is unlikely to solve it. “We asked an underwriter, ‘What happens in six months?’ And they’ve said, unless there is a vaccine, we will likely be postponing for a further six months.”
So buyers who have recovered from Covid or those whose health makes it riskier for them to contract it are stuck in limbo.
The advice to house hunters is to get insurance in place fast, even if you haven’t found a house yet. Those with underlying conditions should still apply as applications are considered on a case-by-case basis.
On a break
If you have taken a mortgage break or gone interest-only for an extended period, mind the gap. The life insurance for the mortgage will be on a reducing balance basis and will continue to decrease, even though the mortgage balance has remained static.
If your dependants rely on your salary, it's a good idea to have additional life insurance
“This would result in a shortfall if either partner died,” says Hardiman. Those on a mortgage break should review their life insurance accordingly.
New Ireland has a three- to six-month premium waiver on mortgage protection plans for those on a Covid-related mortgage break. Other companies are offering premium holidays where you can apply for a break on your premiums and stay covered. The unpaid premiums are collected over a 12-month period after the premium holiday.
Get a life
Now that you’ve got the house sorted, there’s everything else to think about. If your dependants rely on your salary, it’s a good idea to have additional life insurance. A life policy pays a lump sum to a person you name if you die during its term.
But before signing up, check if you already have death-in-service benefits through their employer. Many people do and these pay a multiple of salary should you die while in employment. You might need more cover but, with mortgage protection and death in service, the balance of cover that you need to purchase will be lower.
Do remember, changing jobs may leave you without cover.
But it’s not just the salary of the breadwinner that warrants protection; the death of a stay-at-home parent will cost a family dearly too.
The monetary value of stay-at-home parents is generally undervalued, says Sara Murphy, marketing lead at protection specialist Royal London. "Research we conducted last year estimated the cost of replacing all the tasks carried out by a stay-at-home parent is nearly €44,000 [a year], although people tended to think it was much lower."
When valuing the work of homemakers, Lorraine Cooke estimates a cost of €30,000 to mind children and run a home in the event of the homemaker dying. “People say, sure I’m at home, I don’t need life cover, but they do, even more so because there is a cost to replace that work.”
The younger the applicant, the lower the premium will be for the term of the policy, usually 25 to 30 years, says Hardiman. Leaving it until your 40s will result in higher premiums. “We’ve seen loadings for individuals with high blood pressure and raised cholesterol which is more likely to develop as time goes on. Get your life cover young before any health issues may occur.”
What’s the right level of cover? Well, you don’t want the monthly direct debit for the premium to be so much that you can’t enjoy the here and now.
“Prioritise life insurance for your mortgage first and having additional life insurance equal to a minimum fives times take home pay,” says Hardiman.
Your income is your most valuable asset. If you don't have it, you can't pay for anything
He recommends having life cover in place until your youngest child turns 25, with an option to extend the cover for longer without medical underwriting. “The benefit of a longer term is you are fixing your premiums for a set period of time at a better rate rather than reapplying after 10 years.”
Cohabiting couples also need to beware. Those who don’t set up their life insurance plans properly could face a significant tax bill, warns Hardiman. “If a partner died, the life insurance payout could result in 33 per cent capital acquisitions tax on the majority of the claim proceeds for the surviving spouse.” Get the policy structured correctly from the outset.
Your next priority should be income protection. It pays out a percentage of your income if you are unable to work because of any injury or illness. Being unable to keep up with bills can add to the stress of illness.
Social welfare can go some way towards filling the gap, but for most people it’s not enough. “Your income is your most valuable asset. If you don’t have it, you can’t pay for anything,” says Cooke.
There are two things to consider when choosing a policy: the deferred period – that’s when the policy starts – and the expiry age. Deferred periods are typically four, eight, 13, 26 or 52 weeks after the event. For most people, the expiry age is retirement age, from 65 to as high as 70.
“So, if you are continuously out of work for four weeks and make a claim at that stage, that will continue to pay out until you return to work or until the expiry of the policy,” says Cooke. If you go back to work on a part-time basis because your health prevents full-time work, the policy can pay out a proportionate amount, she says. Again, younger applicants will lock in a cheaper premium.
Critical illness cover
If after all these direct debits you have any salary left, you could look at critical illness cover. This type of policy will pay out a tax-free lump sum if you are diagnosed with a specified illness such as cancer or heart disease.
Cancer patients spend an average of €765 a month on related expenses, rising to over €1,000 in some cases, according to a report from the Irish Cancer Society. It is estimated they also lose an average of €18,000 a year in income, or over €1,500 per month, as a result of their diagnosis.
“We work off two years’ net salary for someone who is working, but for homemakers, we work off four times that,” says Cooke. “If they get a specified illness, not only is there the costs with treatment, you have the cost of childminding, or someone coming to mind you if the other person is working.
“In the event of being diagnosed with cancer, you would get the equivalent of two years’ net salary, so if someone’s net salary is €5,000 a month, the sum paid would be that by 24 months. It gives them time to rehabilitate because that’s quite a concern for people going through treatment.”
Daniel Hardiman recommends cover equal to five years of mortgage payments, so that at least the mortgage will be covered if you are diagnosed with a serious medical condition.
But the devil in these policies is in the detail. You can pay for the policy over many years only to find the particular illness you contract is not covered while very similar illnesses are. So get advice to make sure claiming, if the need arises, is as stress-free as possible.
There are ways to cut the cost of your premiums. Getting protection while you are still young and healthy means you lock in a lower-cost premium which won’t, in most cases, increase with age. “Even if you don’t have kids, at least you have taken it out while you are young and it will go with you as your circumstances change,” says Cooke.
Review your policies frequently to ensure they match your circumstances and are the most competitively priced
Cover is expensive for smokers and vapers, but can be made less so if you give up. “Smoker rates are 50 per cent more expensive,” says Cooke. But if you are a non-smoker for 12 months or more, you can go back onto non-smoker rates.
It doesn’t pay to deceive; a policy will be null and void if there is any deception. After years of paying premiums, you don’t want a question mark at the claim stage.
Continue to shop around too. Review your policies frequently to ensure they match your circumstances and are the most competitively priced. If there has been a change in your health, you are unlikely to get a better quote, so stay put. If you find a better price or better benefits elsewhere, don’t cancel your old policy until the new one is in place.
You can claim tax relief on the premiums of Revenue-approved schemes at your marginal rate of tax, up to a yearly limit of 10 per cent of your total income. Your employer will do this. In certain situations, self-employed people can also treat life insurance premiums as a tax-deductible expense.