Is it a good idea to cancel my extra life cover?
I am thinking about cancelling my life insurance.
I have cover in work through my pension, which I didn't have when I set up my life insurance policy, so I think I am over-insured. Am I doing the right thing?
Des, Lackagh, Co Galway
Gavan Ryan replies: It can be dangerous to consider your work cover as a replacement for life insurance. The purpose, cost and type of insurance is what you need to concentrate on, and this should form the basis of your decision.
You need to evaluate your cover. At the very minimum, ensure you have covered your outstanding debt, as this is something you don't want your surviving family saddled with.
After that, focus on the financial impact of your death. If you have children, how much would they need per month in the event of you passing away and how long would they need it for?
Take the example of a couple with three children under five, the youngest being just two. The wife works at home, the husband has a monthly take-home pay of €4,000. The couple have a mortgage outlay of €1,500 per month and no disposable income. They estimate the youngest child will be dependent until 25 and that they will need all of their income until then.
If the husband passes away, the mortgage will be repaid by the mortgage protection that the couple will have. The wife will get €900 per month from the State. Thereafter, the family will have a shortfall of €1,600 per month so the wife will need life cover of €441,600 for the next 23 years (until the youngest becomes financially independent). Of course, cover will also need to be arranged for the husband should his wife pass away. These are unwelcome questions that nevertheless need to be addressed.
I have no idea what kind of pension charges I pay. How do I find out?
Emma, Clontarf, Dublin
Gavan Ryan replies: The trustees of your scheme will be able to give you a comprehensive run-down of the charges - all you need to do is put in a simple request to the person in the company responsible for the pension. In certain cases, charges can be quite complex and not that easy to understand. Thankfully, the charges under corporate pensions are usually lower than private arrangements, as you are effectively buying wholesale and in a lot of instances, your employer is paying the bulk of the costs.
At the minimum, you will pay a management fee and government levy. The levy is 0.75pc this year and is projected to fall to 0.15pc in 2015 and cease then - although many believe this won't be the case. The management fee is paid to your fund manager. Some of the upfront charges you need to watch out for are bid/offer spreads, policy or member fees, contribution charges and an allocation rate (the portion of your money which is invested in your pension) of less than 100pc. It all adds up.
Let's take a husband and wife who are both 30 and who earn €35,000 each a year. They decide to start a pension each in work and put a total of 10pc of their salary annually into it. The husband has a 95pc allocation rate and 1pc management fee. The wife's firm uses the same provider and fund but negotiates a 100pc allocation rate and 0.75pc management fee. Their salaries rise in line with each other but they never pay more than 10pc of annual income into their pension. Still, at 65, the wife has €50,000 more in her pension than the husband.
Gavan Ryan is senior financial consultant at IFG Private Clients
Sunday Indo Business