Wednesday 7 December 2016

Taking out cover for the unthinkable

Investing in your child can also mean ensuring they are looked after if you die

John Cradden

Published 09/08/2015 | 02:30

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Parenthood is a life-changing experience in more ways than one, not least in how it prompts you to change your financial priorities.

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Besides budgeting for essential things like childcare and day-to-day school costs and maybe a bigger car, many parents willingly spend hundreds - if not thousands - on extra-curricular activities, while also putting money aside for third-level college fees.

­After all, the aspiration is for perfect, well-rounded children who can play grade-eight piano, captain the GAA or soccer team, become chess masters and qualify for the finals of the Great Irish Bake-Off before they head off to university to carve out their high-level medical or legal careers.

But are the large numbers of parents who don't take out some form of life cover not getting their priorities right? Yes, according to those behind several recent studies commissioned by Irish Life, Royal London and Laya.

They would say that, of course, being life insurers - but what their studies have clearly shown is just how low the take-up among parents is of this type of insurance.

Irish Life revealed last June that up to 500,000 parents of children under age 17 have absolutely no life insurance. Royal London surveyed 1,000 people nationwide earlier this year and found that 43pc of those in the 34-54 age bracket - the demographic most likely to need this financial protection - did not have life insurance, while two-fifths (42pc) of Irish parents responding to Laya's recent survey also did without this cover.

"The fear is not that people aren't prioritising, but that they aren't actually thinking about it," he said.

Referring to the Irish Life findings, he reckons that the majority of the 500,000 parents with no life cover have not thought about it, and "that they don't realise the financial impact it will have if they die, and how much of a struggle it can be for the family."

He said that some middle-income earners who can afford to take out life cover may well make a deliberate decision to prioritise other discretionary spending instead, like on extra-curricular activities, holidays and school trips - which, he says, is fair enough.

"If it was a conscious decision, that's fine and you live with the consequences if something goes wrong, but the reality of it is that people don't actually sit down and think about 'what if?'"

As a financial planner, part of his job is to looks at a client's assets, liabilities, income and expenditure before he can recommend to them how to plan their finances better.

"What doesn't surprise me is how much they're spending on extra-curricular activities; what surprises me is how surprised they are at how much they're spending."

Those who do purchase life insurance are often prompted by a new arrival to the family, a change of job and subsequent loss of employer life cover or the loss of a close friend or family member.

"Not everybody acts on those things, but it will cross their mind, but there are still barriers there for people who believe that it's ridiculously expensive when it's actually not."

Some firms are offering term life insurance, which is the cheapest and simplest form of life cover, at rates starting from €15 a month. Term life cover pays out a lump sum or a monthly if you die within a set period of time, say 20 years.

"The cost of term life cover has reduced dramatically over the last few years, and life cover in general has come down considerably in the last few years."

The last life insurance comparison by the Consumer and Competition Protection Commission from early 2014 showed that the cheapest quote for dual term life cover of €250,000 over 25 years for a non-smoking couple both aged 33 would was €37 a month, while similar cover of €190,000 for a non-smoking couple both aged 45 over 15 years would have cost around €54 a month.

Last week, the cheapest online quotes from broker Lion.ie for the same cover for the 33-year-old couple was €31 a month, while for the 45-year-old couple, the cheapest was €46 a month - both roughly 20pc lower than two years ago.

There are a number of options within term life insurance. You could opt for level term insurance, for which the lump sum payable remains fixed. For a little more, you can get index-linked term life insurance, for which the lump sum rises in line with inflation or some other measure decided by the insurer. It also means that premiums will rise a little every year, too.

A cheaper option is decreasing term assurance. "You can buy a considerable amount of cover today that would reduce in line with your need for that cover, and make it cheaper again than a term life contract."

This fact may well surprise some people, according to Joe Charles of Royal London: "Many Irish consumers often believe that the level of life cover should increase with age.

"However, if you look at the risk analysis, it appears that the opposite for most people should often be true."

Indeed, many people might actually have a higher level of cover later in life, at a time in their lives when they simply don't need it. It's easy to see how that might happen, as older people may have more disposable income and can afford more cover.

"However, if you think about it, it's clear that a couple in their 30s with a young family have greater expenses and dependencies - and therefore they have a more pressing need for sufficient life cover than a couple approaching retirement with adult children who are no longer dependent upon them."

But a common theme in discussions with life insurance-phobics is that it raises issues that might be a bit too close to the bone. Laya's survey revealed that 25pc of parents were not comfortable talking about their death with their spouse and family.

"That's pretty understandable - who really wants to allocate much of their day contemplating their own mortality?" said Mr Charles.

"What we tend to find is that the need for life cover protection is generally accepted - but, and this is often the crux of the issue, people's estimates of the levels of cover needed don't always match up with what is actually required."

In its survey, the insurer asked respondents how long they believed a life cover payout of €400,000 would last if a family had monthly bills of €3,000.

Out of the 1,000 people surveyed, 340 believed it would last less than 10 years, while 140 people believe it would actually last more than 20 years. The right answer is that it would last just under 12 years, according to the firm.

The Irish Life survey also hints at a deficit in cover among those who do already have life insurance, with just 5pc of those polled having cover above €300,000 - while the average policy is worth just €152,040.

For anyone with an average income of €36,003, this represents just a little over four years' salary.

Some couples with families may only take out cover for just the main or sole breadwinner rather than a joint or dual life policy in order to save on the premiums, but don't discount the monetary value of the work of a stay-at-home parent, advises Mr Charles.

"Although it may be an unpleasant thought, in the event of the stay-at-home parent's death or serious illness, it may simply be unaffordable to someone to undertake the typical household jobs carried out by them."

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