It Would be a Crime to Ignore Life Insurance
Consumers tend to pay more attention to choosing car insurance than life insurance. If you don’t know the difference between the many different types of life insurance and assume that all policies are for life, then prepare to be seriously mistaken. There is also a good chance that you are paying too much for your policy. You could also be buying too little cover for too long a term.
Here we explain the seven most common mistakes people make when purchasing life insurance.
Mortgage protection is not a family protection policy
Many people feel if they have mortgage protection, they have family protection. This is not correct.
A bank or lender will require a life policy to be put in place to cover the mortgage on a family home. This exists to protect the lender in the event of death of one of the borrowers. Upon the death of a partner, it’s a comfort to have the family home debt-free. However, it leaves no lump sum for the family to survive financially.
A life policy is designed to replace future income on death. It allows a family to remain financially secure for many years if one or both of the incomes stops suddenly.
According to a survey conducted at Orca Financial and Oomph.ie, 46% of the life cover holders said their life assurance was a mortgage protection policy.
Underestimating the cover
In a family where a main earner brings in a net annual income of €35,000 per annum, life insurance of €100,000 may sound a lot. There is no doubt that it will add financial security for a family in the short term. In the long term though, there will more than likely be severe financial strain.
If, for example, there are three children in the family, aged 11, nine and seven, a more appropriate amount of cover would be about €350,000. This would allow a surviving partner to invest the proceeds of the payout . They will also draw off the €35,000 per annum over a 13- to 14-year period, if invested properly.
Replacement income should be calculated to last until the youngest child in the family reaches independence, at about age 21. Some cover is always better than no cover, and budgeting will also be a factor. However, if possible, life cover should be calculated at a minimum of 10 times net salary.
No income, no cover
There is a misunderstanding that a spouse or partner who chooses to remain at home and look after the children has no need for life cover. This is incorrect, as there is a sizeable financial contribution made to a family by an individual choosing to remain at home rather than work.
Without wanting to sound cold, the financial implications need to be considered. Depending on the age of dependent children, a homemaker should be insured to cover the subsequent costs that may be incurred until the youngest child reaches independence.
Overestimating the cost of insurance
In most cases, life insurance is a lot cheaper than people think. The Oomph.ie survey found that the vast majority of respondents overestimated the cost of life assurance. For example, a non-smoking couple in their mid-thirties can attain €250,000 life insurance over 10 years for about €7.50 a week. A couple in their mid-forties can attain the same cover for about €15 a week.
Do not buy off anyone, or institution, that can only sell one company’s products
There are six main providers of life assurance in the Irish market. An independent broker should ensure that you get the best available price.
If you have recently bought life cover from your bank or a tied agent, it is worth getting a comparative quotation to establish if you received the best available price on the market. It’s unlikely you did.
Get the term for which you need cover correct
The term of your insurance is an important factor when determining price. Personal life cover is required to make sure there is financial stability in a family until there is no longer a need, generally when the youngest child hits independence.
Life cover taken on for longer periods may only increase the cost of cover. You may be better off taking out higher cover for a shorter term. Similarly, taking out cover for too short a term may leave you in a position that the cover runs out when you need it most and it will cost a lot more to replace as you get older.
It is possible to take out cover for a higher amount over a shorter term, and include a conversion option. This allows the policyholder to convert their cover to another plan at any stage of their existing policy. They will not have to further medical information at the end of the term. The option can be added to most life policies for very little additional cost.
Lack of belief in life company claims record
Life insurance companies have some of the strongest claims payouts in the trade, with an average of 99% of claims being paid from companies operating in Ireland. It’s hard to dispute death. Yet it is vitally important that all details are completed correctly on life insurance application forms, including smoking status, medical history and family history.
If someone has had a medical scare, it does not mean they won’t get cover. While they may or may not be charged a premium based on their medical or family history, it is still worth making the application to establish the position
John Molloy is managing director of Orca Financial Services. He is a founder of Oomph.ie, an online life insurance broker
Life assurance or insurance?
There are two types of life cover, assurance and insurance. Though the terms are often interchanged, they refer to two very different products.
Assurance refers to an event that is assured to happen, where as insurance refers to something that merely might happen.
If you take out a whole of life assurance policy, and continue to pay the premium, there will be a payout of the insured amount to your estate in the future. As a result, premiums are a lot more expensive. Life insurance is much more common. An individual or couple typically insure themselves for an agreed amount over a fixed term. Should they pass away during this term, the cover is paid out, if they don’t, there is no payout.
Life insurance is taken out generally for the period in which there is a potential financial exposure for a dependent family.
Whole of life assurance would typically be arranged as part of an individual’s inheritance tax planning, and should be discussed with tax advisers and reviewed every few years.
Royal London offers whole of life cover with a “life changes” option. This offers the ability to pay for cover for 15 years and then cease payments. For an additional 10% of the premium, agreed at the outset, you get an option at the end of the cover period to get cashback of 70% of the premiums paid, or leave a percentage of the cover in place until you die.