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Finance - Protect your family in event of the unexpected

Friday, 6 November 2009

This is not something that people talk about often but it is something that should be discussed as a family in case something was to happen. Liam will discuss what effect death, serious illness, redundancy, an accident, illness etc. would have on your dependents so you can make sure by proper financial planning that if the worst did happen that your family is well protected.

Liam Croke: Money Expert
Liam has worked in the financial services industry for the past 21 years and seen by many as an expert in the field of personal finance. He is a qualified financial and mortgage advisor.

In the past he has held senior management positions with two well known financial institutions along with one of the "top 5" accountancy practices in Ireland.
Liam gives his advice and wisdom on a daily basis to those who are just starting out to high net worth individuals. He currently works for a financial services company based in Limerick.

He is frequently asked to contribute and comment in all areas relating to personal finance on both national and local radio stations. You will have heard him for example recently on RTE's "The Mooney Show" and on Newstalk's "The Right Hook."
Liam was invited to make a presentation to the Joint Oireachtas Committee on Social & Family Affairs on trends and levels of personal debt in Ireland. He made his presentation to the committee on the 24th June 2009.

Liam is author of 4 personal finance books:
. The best selling "The Mortgage Maze Explained" published by Currach Press in 2006.
.
The best selling book "Your Money Your Life - Managing your finances in today's Ireland" published in 2007.
.
"I'm Broke! A teenagers guide to Money" - Published by Crabtree and distributed in the UK & USA in 2009
.
"Stash or Splash" which is being released in Ireland and the UK in September of this year.

. Liam previously wrote a weekly personal finance column for The Sunday World entitled "Mr. Cash - How to Save it, Spend it, Earn it" and has also written articles for the Sunday Business Post, the Evening Echo, the Sunday Independent, the Irish Sun, Prudence Magazine to mention just a few.

Liam Croke: Protecting you and your family!

This is a subject that many people do not like to talk about or want to deal with and who can blame them, death, serious illness, unemployment etc. are not particularly pleasant subject matters. However, they are incredibly important, if you have children for example think for a minute of their financial needs and that of your spouse if you were to die?

You would obviously not want the standard of living that they currently enjoy to drop in the event of your death or serious illness. By first understanding what effect death, serious illness, redundancy, an accident, illness etc. would have on your dependents you can make sure by proper financial planning that it the worst did happen that your family are well protected.

Let me ask you some questions:

1. Have you adequate life cover in place that would replace your net monthly income in the event of your death?
2. Do you know even how much cover you have?
3. Do you know how much it should be?
4. How much are you paying for the level of cover you have?
5. What type of policy is it?
6. Where is the policy document?
7. Have you thought about what would happen if you suffered a serious illness?
8. What happens if you had an accident and could not work for a number of months? How much would your current employer pay you and for how long?
9. What happens to your pension if you were to die?
10. What would happen if your stay at home spouse died? Have you thought about childcare costs?
11. How will you pay your mortgage and other bills if you had to live off a weekly disability benefit of just €204?

These are all questions that you have to address and admittedly are a "bit cold" but let's get real and start finding out the answers to them. If you don't and then something happens, it will be too late to do anything about it.

We all know someone that has had a loved one die, or someone who suffered a serious illness and had insufficient cover to replace their income. What happens then? They have to try find a job to make ends meet, borrow money just to get by etc. don't let this happen to you or your family!

The main areas that you want to have protection against are:

1. Death
2. Serious illness

1. DEATH:

How Much Life Cover Do You Need?
This will very much depend on your own particular circumstances and "one size does not fit all". Not everyone even needs life assurance. If you are single and have no dependants then no one would be harmed financially by your death, so no real need to have life assurance, other than having your mortgage protected, if you have one.

If you are married and have children then the financial impact of your death could be devastating to them, so the questions are how much and what type of policy is required?

I cannot stress enough that there is no general guideline that suits everyone. When I carry out reviews for new clients of mine and ask them how much cover they have and why they have that amount, they tell me that when they affected the policy in the first place they were advised that it should be based on a multiple of their salary, what nonsense! All of the following factors have to be considered when arriving at an exact amount of cover you need:

3. What is your net monthly income that needs to be replaced?
4. What if any will your spouse receive from your pension?
5. What is the widow's state pension?
6. Is there any investment income your spouse would continue to receive in the event of your death? I.e. rental income, share dividends
7. How much do you spend currently on yourself each month?
8. How much is your mortgage repayments?
9. How much do you pay for insurance?
10. What is your existing level of life cover?
11. How old are your children?
12. Will your spouse be entitled to a death in service benefit?
13. How much have you got in savings?

All of these questions need to be answered first before you can arrive at a figure that is absolutely suitable to your particular circumstances and only then will you know that you have either too much or too little cover.

Below is an example of what I mean when factoring in the loss and gains of income in death so you arrive at the correct level of cover. This individual has a gross annual salary of circa €35,000 which equates to net monthly income of about €2,625:

Life Insurance Summary:

If a fatal accident were to happen, his family would.....

Need to cover his monthly income of €2,625

Less: Monthly income payable on his death:

. Employers pension €0

. Widows state pension approximately (two dependant children) €1,134

. Investment income (rental income, share, dividends etc) €0

Less: Monthly income no longer required:

. Amount on self €150

. Mortgage Repayment (covered by mortgage protection) €785

. Insurance repayments €70

Monthly income Required/Shortfall €486

To compensate fully for this change would require a lump sum of €194,400 to generate this shortfall less,

His existing level of life cover €20,000

Death in service benefit if any €0

Liquid assets - cashed within 6 months €5,000

Which means that he would need additional life cover of €169,400

So, his existing level of life cover together with the new amount and his savings when invested at a net rate of 3% would generate a monthly income of €486 whilst maintaining the capital sum.

The above is assuming that there are no other loans in place that need to be repaid in the event of your death. If for example you had a car loan and a personal loan that need to be repaid if you were to die then you would increase the amount of cover equivalent to the amount outstanding on these loans.

If this client did not review the level of life cover he had, and if he were to pass away his family would have been left in a serious financial situation.

There will of course be cases that if I were to apply the above to some people it will highlight that they are in fact over insured and paying too much each month for cover they do not require. It is my experience however that the majority of us are in fact under rather than over insured.

So, the importance from a cost point of view and more importantly in having the right amount of cover for your family is extremely important and all of the above factors have to be considered.

How Much Does it Cost?
The larger the sum assured then the higher your monthly premium will be. Other factors that influence the cost are:

. Age
. Smoker status
. Occupation
. Length of policy
. Current health status

OK, you get the right level of cover, is there really that much of a difference between the various life companies in the marketplace? Well you would be surprised.

Lets look at an example, this time we are looking for life cover for €200,000 level cover I.e. stays the same amount, for a male aged 45 next birthday, a non smoker and the term of the policy is for 20 years with a convertible option.

Insurance Company Monthly Premium
Life Company 1 €40.33
Life Company 2 €42.53
Life Company 3 €42.53
Life Company 4 €45.00
Life Company 5 €47.24
Life Company 6 €48.53
Life Company 7 €53.78


You can see from the above the difference from the best and the worst is €13.45 per month. Again not particularly life changing but a saving of €161.40 non the less over the course of the year so why not avail of this if they were all to have the same benefits and will all payout the same amount of cover!


2. SERIOUS ILLNESS

Serious illness is a subject that many people do not want to talk about and who can blame them, it is not a particularly nice topic of conversation, but one that is incredibly important.

If you consider the financial implications that could happen to you and your family in the event of you becoming ill, it is very important to make sure you are protected against this eventuality.

The statistics are frightening in that:

. Men have a 1 in 4 chance of becoming seriously ill before the age of 65
. Women have a 1 in 5 chance
. The most common illnesses are cancer, stroke and heart attack.

Is there any thing people can do to financially protect themselves should they contract a serious illness?

The good news is that if you do suffer a serious illness the chances of your surviving it are very good but your lifestyle may need readjustment.

You could effect a serious illness policy that will pay out a lump sum in the event of you contracting an illness covered under your policy.

Some of the illnesses covered under most policies include:

Heart Attack Cancer Coma Kidney failure

Alzheimers Stroke Severe burns Loss of sight

Surgery to aorta Kidney failure Major organ transplant Multiple Sclerosis

Your monthly premium will depend on your age, the amount of cover required, current health status, smoking status, family medical history.

A 40 year old woman for example looking for €100,000 worth of serious illness cover for 20 years who is in good health and is a non smoker, this cover would cost her the following:

Insurance Company Monthly Premium
Life Company 1 €52.37
Life Company 2 €52.62
Life Company 3 €53.32
Life Company 4 €54.72
Life Company 5 €58.64
Life Company 6 €61.96


For a man it would cost him €56 per month.

Is it worth taking out such a policy?

I believe so, you obviously hope that you never have to make a claim but it gives you great peace of mind knowing that if you were diagnosed with an illness that prevented you from working for a period of time that you will receive a lump sum that will help with your mortgage repayments, medical bills and so on. It makes your recovery that little bit easier knowing you are free from money worries because if you didn't have such a policy or savings to fall back on would you be able to survive on the current state disability benefit of €204 per week.

When you are taking out a life or serious illness policy what you are buying really is "peace of mind" so that if something were to happen to someone that a lump sum would be payable to you - there is no cash value with these type of policies.

You have also got to remember that if you fail to pay your premiums your cover will lapse so it is very important to keep paying these premiums on time all of the time. You can protect yourself by having what is called a "waiver of premium" built into your premiums which is an extra payment where in the event of you becoming disabled or ill, and unable to work for a period of time well then the insurance company will pay the premiums for you until you are able to return to work.

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