Life Insurance is a policy that you can take out which would pay a tax free lump sum to your family/estate in the event of your death.
There are lots of reasons why people need life insurance, some examples are:
- To provide an income to your family to replace your income
- To ensure the survival of your business – in the event of your death, or a key employee’s death
- Repay any loans – e.g. Mortgages, bank loans etc.
The most common types of life insurance
These are explained here, simply select one to read more:
1/ Mortgage Protection
Mortgage Protection is one of the cheapest forms of life insurance. Why? Well because the level of life cover is designed to reduce alongside your mortgage.
John & Sinead have a mortgage of €200,000 over 20 years. Their bank requires them to have a Mortgage Protection plan for €200,000 over 20 years. In year 10 John has a sudden heart attack and dies. The current level of cover on the mortgage protection plan is €100,000; similarly the outstanding mortgage is circa €100,000. A claim is made on the life insurance policy and the lump sum is paid directly to the lender to clear the mortgage. If there is surplus after the loan has been paid, the balance will be paid to John’s estate.
You can opt to include the additional benefit of Serious Illness cover on your mortgage protection plan. This would be set up on an “Accelerated Serious Illness” basis. This means that if you make a claim for Serious Illness on your Mortgage Protection plan, the life cover is reduced by the claim paid.
Mark & Louise have a mortgage of €250,000 over 25 years. Their bank requires that they have a Mortgage Protection plan for €250,000 over 25 years. They decide to include serious illness and pay an additional premium for this benefit. Should Mark or Louise suffer a defined serious illness, then the mortgage protection plan would pay out the current sum insured to the bank.
It’s worth nothing that you do not have to have your whole mortgage covered for serious illness. It can be expensive, but even having half of your mortgage covered for serious illness can give you extra peace of mind.
A mortgage protection plan can only be done on a single life basis or a joint life basis. You cannot include indexation or the conversion option on a mortgage protection plan. There is no cash value at the end of this plan.
2/ Term Life Insurance
Also known as Level Term Cover – this life insurance policy is taken out for a specific term. The main difference between Level term life insurance and Mortgage Protection is that the level of cover here does not reduce.
Peter & Linda have two children under 4. They want to protect their family’s financial security in the event of one of them dying. They start a Level Term Life insurance plan for 25 years. They decide on a level of cover of €300,000. In year 22, Linda has a major stroke and dies. The life insurance company pay out €300,000 to Linda’s estate. The policy is now ceased.
3/ Convertible Term Life Insurance
Convertible Term Life Insurance is almost the same as Level Term Life Insurance – but it has an added benefit – a Conversion Option. A conversion option is a very valuable benefit which allows you to “convert” your policy to another plan, at any stage throughout the term of your policy, without providing any evidence of health.
An example of where the “Conversion Option” is very useful:
Philip and Louise have a Convertible Term Life Insurance policy with 2 months remaining. Louise has been diagnosed with breast cancer and is very seriously ill. They use the conversion option on the policy to start a new policy for another 20 years. The insurance company do not look for any medical details – they assess you based on your health when the original policy was taken out. The premium payable is based on their current age. Philip & Louise now have the peace of mind of knowing that they still have life cover.
4/ Whole of Life
A whole of life policy is taken out with the intention of covering you for all of your life. There is no set term on the policy, it will continue forever. Sounds good eh, but there are some downsides;
- It is expensive. Because you are covering yourself until you die, the cost of cover is more expensive. You could live until you are 101!
- The premiums can change. Initially your premium will be guaranteed for 5 or 10 years. Then the insurance company carry out a “review” of the policy. They will assess the current premiums, level of cover etc and they can increase your premium.
You cannot purchase Whole of Life Insurance on Low.ie.
Who can be covered on the Life Insurance policy?
There are many different ways that you can set up a life policy and we will explain these here.
1/ Single Life – Life Insurance
Pretty much what it says on the tin; one person is covered. This could be you, your husband, your wife etc. If this person dies within the term of the policy, the proceeds will be paid to the policyholder’s estate.
Julie is single mother and starts a life insurance policy for €200,000 for 20 years. She dies in year 18. The €200,000 is payable to her estate. The policy ends.
2/ Joint Life Cover – Life Insurance
As it suggests joint life cover is taken out for two people and is payable on one death within the term of the policy. This can be structured in two ways:
- Joint Life – First Death: the policy will pay out after the death of one of the people covered.
- Joint Life – Second Death: the policy will pay out after the death of the second person covered.
Joint Life First Death is the most common policy to be taken. When the claim is paid, the proceeds will be paid to the other policy holder. As there is only the potential for one payout, there can only be one sum insured, i.e. the two lives cannot be covered for different amounts.
Julie & Joe have a joint life first death policy. They are covered for €250,000 for 25 years. In year 20 Joe dies. €250,000 is paid out to Julie and the policy ceases.
3/ Dual Life Cover – Life Insurance
Dual Life Insurance is similar to Joint life insurance, in that it is set up on two lives. The fundamental difference is that a payout is possible on both lives. This is a very valuable family protection option.
Julie & Joe have a dual life policy for 25 years. Joe is covered for €400,000 and Julie is covered for €200,000. After 5 years Joe dies, €400,000 is paid to Julie. The policy remains in force, and Julie remains covered for €200,000. If Julie were to die within the remaining term, her estate would receive €200,000. If Julie was still alive at the end of the term, the policy would cease.
Additional benefits that you can include in your policy are indexation and a conversion option.
What is Indexation?
Indexation allows you to increase your life cover in line with inflation. This means that the level of cover that you have will increase each year by a certain percentage. Each provider has different rates of indexation. Sometimes, the rate your benefit increases is lower than the rate your premium increases. Our provider’s indexation rates are as follows:
|Provider||Rate of Increase of Benefits||Rate of Increase of Premiums|
What is a Conversion Option?
A conversion option is a very valuable benefit which allows you to “convert” your policy to another plan, at any stage throughout the term of your policy, without providing any evidence of health. You can include a conversion option in Life Insurance Cover and Serious Illness Cover.
Mark has a life insurance policy with a conversion option that he took out 10 years ago. He needs new life insurance cover for a mortgage on an investment property that he is buying. His health is not as great as it was 10 years ago – he now suffers with high cholesterol and is over weight. If he took out a new policy, he would have to pay an increased premium due to his health. Instead he “converts” his existing policy to cover his new mortgage. The premium is based only on Marks current age and his health is not taken into account.