Prudence is a word seldom used in financial circles. John Lennon wrote a song about a girl and entitled it Dear Prudence, but when it comes to ensuring that if you die your loved ones are financially taken care of and /or any loans or financial commitments paid off, obtaining that form of prudence can be expensive.
All lenders in Ireland are obliged to ensure their customers have mortgage protection when borrowing against their home and also state that it would be prudent to consider life and health cover for all other types of loans. This can range from accident or sickness cover to income protection – the only form of insurance outside of life cover via a pension that attracts tax relief at your marginal rate..
In some cases, life cover on home loans can be waived. If the applicants are aged over 50 or are penalised through more expensive premiums because of health problems, they have the choice of signing a Waiver form that basically states that if they die, the surviving partner or next of kin has to continue or organise the repayment or renegotiation of the loan at that point.
Also, ill health before aged 50 resulting in higher life cover premiums may also allow you to request the Waiver.
Life insurance is cheap – there are three kinds of life cover / insurance:
1. Decreasing life cover (or mortgage protection) – as the name implies, your mortgage balance is covered and as it decreases through capital being repaid, as does the life cover. This is the cheapest of the types of life cover available. Best to also keep it nice and simple and not complicate matters by including other risks such as serious illness cover.
2. Level term assurance / convertible level term assurance – this means whatever the original sum borrowed is covered for the entire term irrespective of what the balance is when the life assured dies. This is therefore more expensive than decreasing cover. With the convertible term insurance, you have the right to extend the policy without having to do a medical on maturity.
3. Whole of life cover – this covers you until you die for the whole of your life. This is the most expensive but the younger you start paying into this kind of policy, the cheaper the premiums.
Dependents – younger or older – should also financially covered should anything happen to either parent. This includes stay at home mums or homemakers. Prudence again dictates that if you have children, you should have separate stand alone life cover until completion of the youngest child's 3rd level education in case anything happens to either one of you.
The recommended formula is: 10 times the net joint annual income less any Death in Service benefits until that 3rd level completion date.
Joint life or Dual life? With the former, the policy ceases with the first death while with the latter, it pays out twice…on BOTH deaths. There is little additional cost, if any, for this feature so always ask for it.
You can of course also insure against Serious Illness (or critical illness) – where you receive a lump sum if you contract a serious illness. Generally the lump sum covers you for a couple of years until you get back on your feet.
Sadly, about 95% of all claims cover three illnesses so it is specific. Employment incapacitation is covered by Income Protection cover. This is where if you cannot work for whatever reason – includes mental breakdown, you can receive up to 75 of your monthly income after a deferred period (usually 26 weeks though you can opt for 13 weeks – a little more expensive) right up to when your pension kicks in or you return to work, whichever is the sooner.
This is also called Permanent Health Insurance and it is the only type of assurance outside of pension linked life cover, whereby the premiums paid attract tax relief at your marginal rate. Certainly if you are the only bread-winner in the family, this should be considered.
To get the best deals, talk to your preferred insurance company, an authorised adviser or drop me a note at firstname.lastname@example.org.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.