Taking care of your family is part of everyday life. Providing them with financial security is one way of looking after them.
What is life insurance?
It is difficult to think about the effect your death would have on those who depend on you. But it is important to plan for their needs and to look at the financial effect your death may have on the people closest to you. A life insurance policy pays your estate an amount of money if you die during the time limit set out in the policy.
How much life cover do I need?
This depends on your life stage. Generally, if you have a young family, you would need a larger lump sum than if your children are older. You will need to consider buying enough insurance to:
• Cover your family’s income needs for as long as necessary
• Pay off your mortgage and any other loans
• Cover costs that might arise when your children are older, for example school or college fees.
How long do I need life cover for?
If you have a young family or plan to have more children, you may need life cover until your youngest child has left school or college. This could mean a term of 20 to 25 years. If your children are older, five or ten years of cover may be enough.
Some whole-of-life policies give you cover for your lifetime so you do not have to decide on a specific term but these policies cost more than those with a set term.
Types of life insurance
Term life insurance
This is the simplest and one of the cheapest forms of life insurance. A term life policy gives you a lump sum if you die during the term of the policy.
For example, you might take out a policy on your own life for €100,000 over 10 years. This means if you die within 10 years, the policy pays out €100,000 once someone can give proof of your death. If you don’t die within the term of the policy, no benefit is paid out and the policy ends.
You may be able to add extra benefits to a basic term policy for an extra cost. These benefits could include:
Serious illness cover
A conversion option – this option lets you convert your policy into a new policy at the end of the term and you don’t need to prove your state of health at that time. Usually, you have to be under 60 or 65 to get this option. It means you will be able to get life cover when you are older, in return for paying a higher premium now. An indexation option also known as ‘index-linking’, this means the amount you are covered for increases in line with inflation each year. Typically, your cover rises by between 3% and 5% to keep pace with inflation, which would, over time, reduce the value of any money paid out.
Some insurers offer life policies that insure you for your whole life, or for as long as you want to keep paying premiums. The premium on these policies is higher than with basic term insurance and can increase at regular intervals.
Mortgage protection insurance
The purpose of this policy is to repay the outstanding balance of your mortgage should you die – and it’s usually a requirement of most banks & lending institutions. More importantly, with a mortgage protection policy in place, you’ll gain peace of mind from knowing that your mortgage will not be a financial burden on your dependents, should you die unexpectedly. Your policy runs for the same length of time as your mortgage, and the premium you pay each month depends on the size of your mortgage as well as your age, gender and the state of your health. The premium is fixed for the term of the mortgage.
If you die, your insurance company pays the policy benefit direct to your mortgage lender. Your lender uses the amount needed to pay off the mortgage and, if there is any left over, they will pass it to your estate.
Types of mortgage protection
Generally, your mortgage protection cover reduces from year to year as the amount you owe on your mortgage goes down. This is called ‘reducing term cover’. It is the most common and the cheapest form of life cover.
You can also get a more expensive type of mortgage protection policy, known as a ‘level-term policy’. This gives you the same amount of life cover throughout the mortgage term. It is usually used for an interest-only mortgage or an endowment mortgage where the capital balance owing stays the same until the end of the mortgage term.
Serious Illness cover
Serious illness insurance pays out a tax-free lump sum if you are diagnosed with one of the specific illnesses or disabilities that your policy covers. It is also sometimes called ‘critical illness cover’. It is often sold as an extra benefit on a life insurance or mortgage protection policy.
The list of illnesses covered varies from company to company, but usually includes:
• Stroke and heart attack
• Some types of cancer
• Coronary artery disease
• Multiple sclerosis
• Kidney failure
• Motor neurone disease
• A benign brain tumour
• Severe burns.
Mortgage repayment protection
Mortgage Repayment Protector is an insurance policy that will cover your mortgage repayments if you as an employee are unable to work and remain so for 30 days or more due to an accident, sickness or being made redundant. Should you be self-employed you will be covered for accident, sickness, financial insolvency or if your company becomes bankrupt and you are unable to work for a period of 30 days or more.
Income protection insurance & Permanent health insurance
An income protection policy pays out a regular cash payment that replaces part of your lost income if you have a long-term illness or disability and you can’t work. It is also sometimes called ‘permanent health insurance’. Income protection policies are not the same as private health-care plans. If you are ill and need medical or hospital care, private health-care plans help pay for the cost of your treatment and hospital costs. They do not pay out any cash benefit. Income protection plans do pay out a cash benefit, but only if you are not able to work because of your illness. The cash is paid out as an ongoing taxable regular income for as long as you are not able to work because of the illness.