Business Personal Finance

Sunday 23 October 2016

Four golden rules when taking out life cover

Daragh Feely

Published 05/04/2015 | 02:30

Daragh Feely
Daragh Feely

The biggest mistakes you can make with life cover is not taking the time to sit down and understand exactly what you need.

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There are a myriad of life cover products out there which provide financial compensation to individuals and families should death or illness strike - and it can be hard to know what exactly you should buy.

Many people make the mistake of only focusing on mortgage protection - simply because banks insist you have this type of insurance before granting you a mortgage. Mortgage protection repays your mortgage should you (or your partner if it is a joint mortgage) pass away before it is cleared. However, this cover only looks after the servicing of one debt if a person were to pass away. It doesn't look at any other scenario in which a family's income would be reduced and in turn result in a household being unable to meet their monthly repayments on other loans - or pay for other living expenses.

Here are four tips which should keep you on the right track with life cover.

1 Don't underestimate the amount of life assurance you need.

While many people with a family will accept that it's necessary to have plans in place to cover the financial implications of the death or serious illness of the breadwinner, a lot of people underestimate the level of cover that is really required. For example a €200,000 payout under a life assurance policy will only last six years for a household who needs a monthly income of €3,000 to cover their living and other expenses. It's important to do the maths when it comes to life cover and to know how much you or your family will really need in the event of a claim.

2 Don't rule out serious illness cover. This insurance, which pays out a tax-free lump sum should you be diagnosed with an illness covered by the policy, isn't always considered a necessity.

However, for many people, it really is something that should be considered to ensure that, if they are unable to work and are recuperating from an illness, they can continue to meet their family's financial needs.

3 Consider taking out pension term assurance if you are self-employed - or in a non-pensionable employment.

Pension term assurance is designed to provide life cover for people in non-pensionable employment and is structured to use the tax relief that is currently available under pensions legislation. So premiums paid into such a policy (up to certain limits) are eligible for tax relief at the individual's marginal tax rate.

4 When deciding whether or not you should buy income protection insurance (which provides a regular income if you are unable to work due to illness or injury), understand exactly what source of income you would have if you were unable to work.

Employer sick pay (for employees) usually reduces after six months and stops completely after a year. Unless you have savings and investments to rely on, once your employer sick pay ends, you would have to rely on State illness benefit - which is currently just €188 per week for eligible employees.

Furthermore, the self-employed don't qualify for State illness benefit. Income protection cover could be worth considering for these reasons.

Daragh Feely is broker sales manager with Royal London

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