We were entirely humbled to have been contacted by the Irish Times a few weeks ago and asked for our opinion on life cover for an article by journalist Eithne Dunne, published in the Sunday Times on 21st May. We wholeheartedly gave our 'tuppence-worth' on some of the things we believe are important to consider when selecting Life Cover for yourself. However it also dawned on me how big a problem exists with regards Life Cover, so we are out to quash that problem right here and right now.........in a second!
Firstly, if you are a new visitor to Informed Decisions, welcome, and have a quick look over here to find out what we are all about & why we exist! We are on a mission to bring practical financial planning & personal finance to Ireland's millennials. If not, welcome back to Ireland's only dedicated Money & Financial Planning Podcast!
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What's The Big Problem!?
Life Cover, it's a product (of many sorts!) and as someone recently said to me 'everyone and their Granny sells it'. The commissions paid to the intermediaries and agents who sell it can be pretty rewarding for them. So, do intermediaries and agents be they online or face-to-face make money if you buy Life Cover from them? Of course they do! As do people from whom you buy tanning lotion, cars, carpets, jewellery, cat milk, holidays, lawnmowers, home insurance, windows, taxis, shoes and every other consumable item or service on this planet!
However it is the fact that people make money from selling it that we believe leads to a wholesale dislike and general apathy to this form of 'insurance'! And this is a problem ( oh by the way I was recently told by a reputable source that it is actually OK to start a sentence with the word 'and'!). Consumers are often therefore also sceptical of the benefits and their potential need for Life Cover, and not knowing who to trust! We may all have heard someone (or ourselves) say 'sure yer man/ yer wan was trying to sell me bloody life cover, sure I don't need that stuff, a racket!'.
Maybe you do, maybe you don't but please don't let a sceptical view be a barrier to a potentially life-changing product for your heirs! In this episode we are going to address this problem, we are going to outline how to figure out for yourself if you actually need any Life Cover, presenting purely facts, and you decide for yourself if you need to buy some or not, and also how much Life Cover to buy if you do decide you need some!
I remember almost 10 years ago when meeting a client who insisted that he did not need Life Cover (despite having 5 kids and a wife whom were all relying on his salary!), when I probed he advised it was because "he was not going to die, ever", and he wasn't joking. That's a separate issue and not sure it's one I can address in this blog!!!
So, How Much Life Cover Should I Have?
Over the years I have heard of many many different ways of calculating this, such as 5 times your annual salary, 10 times your annual salary....but these methods don't seem to make much practical sense for a lot of people.
Let's establish if you need any before we look at how much you need! A good question to start this conversation is 'would your death have a negative financial impact on your partner/kids/other people reliant on you or your income?'. If the answer to that is a 'yes' then please proceed. You may need Life Cover but let's continue to verify that.
5 things to consider when assessing the need for Life Cover:
- If I die what are the practical implications for my partner/dependants and how much income would they need as a result? Consider work /accommodation/debts/incomes/managing household/business/kids/other practical things
- Do I have existing Life Cover either a personal Life Cover policy or some cover through work (usually called Death in Service)?
- If I die will my dependants receive other forms of income? Possible forms such as rental income (if own an investment property), State Benefits (Widow/ers Pension), Employer Pension benefits (Defined Benefit Schemes often pay % of pension to dependants).
- Do I have other assets which I would want my dependants to use to provide an income if I die? You may have deposits accounts, investments, shares, land, stock, other assets which could be used to provide income.
- What age are my dependants? This should be the easiest question to answer of the 5 in fairness! This will inform a lot as regards the need for cover and the term of any cover, if you do buy some!
There are 5 nuggets for you, consider those and then we can keep going......nobody said this was going to be easy!
That's all well and good, you have considered these 5, you feel fairly confident that you know the answers to the 5 questions and have all the info at hand. You may have firm believe either way as to needing Life Cover, or not. Let's have a look at a reasonably common scenario!
I'd like you meet Gareth & Karen, married with 2 kids, Sean is 5 and Kate is 2. Both G & K are working, flat to the mat and doing their best for their kids. Hats off to G & K!
Let's take the example that G decides to go and die, the selfish brute! Working our way through the above 5 point plan let's see how they would be fixed.
- Practical implications & Income Need? Karen would face the dilemma of going back to work or to take time out and focus on the kids. Her strong preference is to take time out, focus on looking after the kids at this time, for the foreseeable future, provided she could afford to- she reckons she would need €3,000 per month coming into the house in order to do that - and that's assuming the Mortgage would be cleared separately by the Mortgage Protection!
- Other Life Cover? G had a decent employer who had a 'Death in Service' scheme which means Karen would receive 4 times G's annual salary, so she would get €240,000 tax free lump sum
- Regards other income? Karen would be eligible for the 'Widows Pension' (€198.50 per week, plus €29.80 per dependant child) which works out at €1118 per month.....not too shabby! G&K have no other forms of income they are aware of
- Other Assets? G&K had been working hard and trying to save in recent few years, had built up an education fund of €30k, which they are not willing to use for any other purpose (including surviving as a result of G's death!)
- Kids' ages? As above Sean is 5 and Kate is 2. G&K really do want to be in a position to support both through college etc, so are expecting to be supporting them financially until at least 23, so for Kate ( the youngest) that is 21 years away. If they do need cover they would like the cover to remain in place until then at least.
Right, so we now know G&K's answers to the 5 points, let's look at the Maths behind all this and figure out if they do need Life Cover or not:
Monthly Income Needed:
Monthly Income Sorted:
Other Cover: €952
(Converting €240,000 into monthly income - divided by 21 years to bring Kate to 23)
Other Income: €1118
(Widows Pension based on 2 dependant kids)
Total Income Sorted €2070
Karen is Going To Be Out of Pocket €930 per month!
Does G need Life Cover?? Eh, it sure would seem like a viable option yep!
How much does he need, or more accurately how much does Karen need to put in place in order to have the income she needs to do what she wishes if G does die?
€930 per month, multiplied by 12 months and then multiplied by 21 years, so that if G died tomorrow that is the income she would need = €234,360
Feel free to check out this podcast to find out about the different types of Life Cover, and again to ensure you make an informed decision on this stuff!
Crunch your own numbers, or get some help to do it, and then make a decision yourself. Please do make sure that it is an accurate one, as this stuff matters, it matters to your loved ones, and your heirs will certainly give a damn if and when the time comes!
As always thanks so much for reading and spreading the word!
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