Saturday 22 October 2016

Inside track: How to ensure you are not over-insured

Bob Quinn

Published 28/06/2015 | 02:30

It is often the case that the amount of cover you have is directly linked to how much commission your broker wants to earn
It is often the case that the amount of cover you have is directly linked to how much commission your broker wants to earn

If you have life insurance and you bought your policy on the advice of a broker, drill down into your policies and you might find that you are not getting good value, or even the right product.

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A common question asked by many brokers is: "Are you sure you have enough life assurance?" What usually follows is a chilling conversation about the certain destitution your loved ones will face if you don't insure yourself for X amount, at which point you sign on the dotted line out of pure fear.

But my question is: have you been sold too much life insurance?

A new financial planning client of mine came to see me last week with a hand-written page of standing orders to various life companies that she'd picked out of her bank statement.

"What are all these payments?" she asked.

It was a series of premiums providing her with more life cover than she will ever need.

"How did you accumulate all these policies?" I asked her.

"Over the years, my broker said I needed them," she replied.

It is often the case that the amount of cover you have is directly linked to how much commission your broker wants to earn.

How much do I actually need?

When figuring out how much life assurance you need, your broker should look at the net effect of your death on the family finances.

The cover should bridge the gap between your new family income - including the State widow's or widower's pension, any lump sums payable through death-in-service benefits or pension funds - and the costs your dependants will face if you are no longer alive.

If you die at 40 and your youngest child is 3 years old, your life assurance should typically cover the shortfall in that three-year-old's living expenses until he or she is 25 - in other words 22 years.

But as the years roll on, I'd also argue that the lump sum payable on death should also reduce year by year. After all, your assets are growing each year, your level of debt is reducing and the timeline of dependency is reducing as your dependants grow up.

However, many brokers simply replace the income you would have earned until the date of your retirement. This out-dated approach increases the cost of cover... and the amount of commission payable.

Don't ask your broker

Remember that your broker is a product salesperson, exactly the same as the guy in the bank enticing you in for a "free consultation".

Brokers selling life assurance are paid up to 180pc of your first year's premium by insurance companies as commission for selling you their policies.

The life assurer Royal London recently announced an all-time high market share here -and coincidently it now pays one of the highest levels of commission to brokers. I wonder if market share and high commission payments to brokers are related to one another?

It is in your broker's interest for you to sign up to policies, not necessarily in yours. Product providers entice brokers to sell their products, for which the brokers then find unsuspecting clients. The client is the most insignificant piece of the puzzle.

You should expect to be sold a product by a commission-only broker or indeed by any of the so-called financial consultants in the main banks. But before you sign up to any more policies out of fear, ask if what is being recommended matches your objectives.

Finally, ask your broker what level of commission they are taking to set up your policy and watch them squirm.

Bob Quinn is a certified financial planner and principal of The Money Advisers in Naas

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