Life insurance is not a luxury -- it's a need
Published 13/01/2011 | 09:41
AS HOUSEHOLDS around the country continue to try to save money, the idea of buying another insurance policy might not appear to make much sense.
However, a policy such as life cover is not a luxury item. It is a fundamental need.
This is because families with children and/or a non-earning spouse have to make sure their loved ones are financially secure should something happen to the main breadwinner.
In a recent European survey just 11pc of respondents said they "would be well positioned financially" if they die, or suffer a long-term illness or disability.
Research conducted in this country by iReach for Irish Life has found that 58pc of parents say they would struggle financially in the event of a death or illness in the family.
This is why many people worry about how their dependants' lifestyle will be maintained if they die or fall ill.
People tend to shy away from the topic as they feel it is morbid, or they don't want to think about it.
In the "under 40" age category -- those who generally have young families -- people often say they are too young to take out life cover and so dispense with the need for protection plans, according to Irish Life senior manager, protection, Declan O'Neill. However, statistics show that around half of the deaths in this age category are unexpected deaths, road traffic accidents or accidental deaths.
THE PROTECTION GAP
But even those who already have life cover may not have enough cover. These people need to be aware of the protection gap, according to Mr O'Neill.
This is the gap between what a dependant family needs to maintain their living standards into the future if something happens to the main provider, and the amount of money set aside to meet this need through protection cover, savings and state support.
Life cover sales for 2010 were up by 30pc compared with 2009, showing that more people are recognising the need to protect their families in the event of death. But many consumers do not realise how much cover they should be taking out to fully meet this need.
The average life cover claim Irish Life paid in 2010 was just ¿66,033.
This is in the context of the current average weekly income being ¿687. A lump sum of ¿66,033 would only provide ¿78.94 a week as replacement income to a family, according to Irish Life calculations.
This means that ¿78.94 per week would have to cover day-to-day expenses, bills, and education costs, among other expenses.
Little wonder then that people rely heavily on state benefits and employer-provided benefits to meet their protection needs.
However, the state benefit is often lower than required to maintain most people's lifestyle. In the future this protection gap may increase further.
The ever increasing pressure on government spending means state benefits may decline, so the responsibility for protection provision will fall to individuals even more, Irish Life's Mr O'Neill added.
VALUE FOR MONEY
People often struggle to understand the value of a life cover benefit that they hope not to receive.
In a recent UK survey, around 30pc of respondents reported affordability as a reason for not taking out cover.
In a separate question, price was raised by almost half of customers as a reason for not having cover.
However, when asked how much they would pay for ¿100,000 life cover, almost half said they would be willing to pay more than ¿20 per month. In reality, for many people the cost of ¿100,000 life cover is actually below ¿20 per month.
So, for less than the cost of three bottles of wine a month, or a 20-pack of beer, customers can start to meet their protection need.
HERE IS A BRIEF OUTLINE OF SOME OF THE MAIN PROTECTION POLICIES:
TERM LIFE INSURANCE
Life insurance pays money to a person you name (for example, your spouse or dependants) if you die. Term life insurance is the simplest and one of the cheapest forms of life insurance (compared with whole of life insurance -- life policies that insure you for your whole life, or for as long as you want to keep paying premiums, with the premium on these policies higher than with basic term life insurance).
A term life policy gives your dependants 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 to your dependants, once someone can give proof of your death.
If you do not die within the term of the policy, no benefit is paid out and the policy ends.
INCOME PROTECTION INSURANCE
Income protection insurance pays out a regular cash payment that replaces part of your lost income if you cannot work due to a medium to long-term illness or disability.
It is also called "permanent health insurance" -- but is not the same thing as private health insurance. Income protection insurance does not cover redundancy.
You will particularly need this cover if you are self-employed, or if you are a PAYE worker whose employer does not provide sick pay.
You can get tax relief on your premiums at your marginal (highest) rate of tax, up to a yearly limit of 10pc of your total income.
To see how the tax relief works, take a woman who is 30 years old and a non-smoker. Let's call her Jenny. She earns ¿40,000 a year, working as a clerical officer.
If she was unable to work due to illness or disability she would receive ¿9,776 a year from the State in illness benefit.
If Jenny decides that this is not enough money to maintain her lifestyle she may opt to take out an income protection policy.
SO WHAT WILL THIS COST?
If Jenny chooses a guaranteed option -- which means the level of premium she pays will not change for the life of the policy -- then she can expect to pay monthly premiums of ¿54.22, before tax.
However, as she is paying tax at the 41pc rate, the tax relief will mean her monthly premiums will be much lower, at ¿31.99, according to figures provided by Irish Life.
If Jenny chooses the reviewable option -- this means premiums may start off relatively low, but will be reviewed in the future and may go up every few years or so -- then the monthly payments will be lower again.
The monthly before-tax premium will be ¿44.47. But the tax relief means the net premium amount falls to ¿26.24.
The impact of tax relief can make premiums more affordable, but remember your benefit will be taxable if you have a successful claim.
If you are a member of a group scheme, your employer usually takes your premiums from your salary before tax and PRSI are taken off.
SERIOUS/CRITICAL ILLNESS INSURANCE
Serious illness insurance pays you 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, but it can also be sold as an insurance policy on its own.
You can claim the benefit on your policy only if you meet the following three conditions:
The illness you develop is one of the illnesses your policy covers at the time of your claim;
A medical diagnosis confirms that your illness matches the definition of that illness outlined by the insurance company in your policy terms and conditions;
You survive for a period after you are diagnosed. This period may be seven or 14 days, depending on the policy.