How much Life Insurance do you need?
Protection needs are individual and they vary widely from one person to another.
For example, if you have a family then the need to protect your children against a sudden loss of income should cease when they become financially independent. Some children leave school at 16 whilst others will continue with full time education until well into their 20's. You will have to make a realistic assessment of the length of time for which you will need protection.
A survey conducted by LABrokers.ie from their data base of applications shows that the average term requested is 20 years. This would tie in with the typical family requirements to provide cover until their children are self supporting.
Since the objective of most forms of protection is replacement of income in the event of death, the size of the income required to meet future needs and expectations determines the amount of cover required.
"We all want to do the very best for our family and to make sure that we can provide them with financial security. But what would happen to your familys' finances if you were to die? It's certainly not a comfortable thought, or one that any of us like to dwell on for too long" states Greg Dyer, Head of Sales and Marketing at Caledonian Life.
"The logical solution to this emotive issue is to take out a Life assurance policy and adjust the cover periodically to reflect changes in our lifestyle. However, with so much focus these days on pension funding, equity and indeed property investment it's understandable that people sometimes forget to ensure that their level of Life cover is sufficient to meet their monthly income needs" comments Dyer.
For example, the income requirements of a single man will change dramatically when he gets married and has children and his life cover should be adjusted to reflect these different milestones and financial demands.
Caledonian Life has developed a table (Table 1) which illustrates how long your life cover will actually last based on your monthly income requirements.
Based on your needs you may be reassured to see how well your family have been provided for or you may discover you need to review your cover.'
The same principle is relevant for the area of commercial life cover commonly known as 'Business assurance'. While companies may have provided for fire and theft insurance they may not have put cover in place to deal with the financial consequences caused by the death of a firms partner, director or key member of staff.
Greg Dyer goes on to state 'whilst it won't lessen the emotional blow, the proceeds of a business assurance policy can be used for example, to pay off any outstanding debts, the immediate purchase of the deceased partners shares in the firm by their colleagues and in turn the payment of their worth to their estate. Even if companies have a Business assurance policy in place they need to review it regularly with their financial adviser to ensure that the cover is sufficient to meet their changing needs and circumstances.'
There are two ways to judge how much Life Insurance you may need.
The first way is to calculate the replacement income your family would require in the event of either parents death (table 1). Using this method the replacement income you would need dictates the level of cover you may require which in turn dictates the level of premium you would have to pay.
Remember, to allow for possible additional payments (such as pensions or social welfare payments) will may be available in the event of your death, you should take this into account when calculating the amount of your income you need to cover.
The second method is quite simple in that you purchase as much cover as you can comfortably afford for a given monthly outlay. Table 2 will give you a fair indication of the amount of cover a given monthly premium will produce.
Term Life Insurance is the cheapest form of cover. In the event of death, the proceeds from a Term Life Insurance policy can be used to provide financial security in the following ways:
- For your family or dependants
- To provide funds to repay business loans
- To protect profits in the event of the death of a Key Person in your business
Many companies also provide an upfront payment of your cover if you are diagnosed as suffering from a Terminal illness. A Terminal illness is a condition which in medical opinion is highly likely to lead to death within 12 months.
What type of Life policies do people hold?
The latest survey on Types of Life Insurance Held was carried out on behalf of Hibernian Life and Pensions in late 2001 (Base: All Adults) as follows;
- Life Insurance 48%
- Mortgage Protection 26%
- Critical/Serious Illness 14%
- Income Protection 8%
- Other 2%
- None/Don't Know 44%
Barry McCutcheon, Hibernian Life & Pensions said, "Generally speaking, as part of overall financial planning, most people do not give life cover the priority it deserves. Mortgage protection and death in service benefit are often considered sufficient. However, mortgage protection will not cover dependants and death in service benefit generally only provides between two and four times salary, which may not be sufficient for example to provide financially for young dependant children right up to completion of third level education.
Things to consider in deciding what level of cover you may need will include for example the number of dependants, whether there is a second earner and the level of cover they require, the level of cover required for a partner working in the home, the cost of providing for childcare as well as any long term borrowings or loans," he continued.
“Our research shows that only 48% of people have any level of live cover and many of these do not have adequate cover. Life cover has never been cheaper so it is an opportune time for people to review their life cover needs so that if the worst should happen, they will at least have provided adequately for their dependents.”
How to apply
As with all types of Life Insurance, you will have to fill in an application form in which you have to answer certain medical questions. If you already have a medical condition, there will probably be some restriction in cover. However, most people who apply for this cover get it at normal rates.
There are presently over a dozen companies selling Life Insurance in Ireland so by going to just one company you cannot be sure that you're getting the most economical premium or that you're impartial advice. There are no bad life companies, although some may have better rates than others, some may be financially stronger than others and some may provide better customer service than others.
Protection needs are individual so, its a good idea to have your needs analysed so that a personal recommendation on your precise needs can be arrived at. Gather information, talk to your broker or your financial advisor, even browse the Internet. Some Internet brokers can offer large discounts on the cost of Life Insurance.
How much does it cost?
Table 2 gives an indication of the monthly premiums a healthy non smoking couple can expect to pay for various levels of cover.
There is a considerable difference in the amount charged for a smoker versus someone who doesn’t smoke.
Where to Purchase?
If you carry out your own research and have a good understanding of financial products, the internet can be a useful resource and an added bonus is the possibility of obtaining a substantial discount on your first year’s premium.
If you require any options not available or feel that you need advice of any kind it is essential that you use the services of an ‘Authorised Adviser’.
A broker particularly if they stand ‘Authorised’ should be able to give you independent broad based advice. By taking unbiased “independent” advice you should get more choice. More choice generally means lower premiums and a contract that is tailored to suit your individual needs.
If you are thinking of buying direct from a specific Insurance Company, Bank, Building Society or direct sales persons, be aware that an individual company can only advise on their own products and are inevitably biased towards them.
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