27th January 2015

What happens to your loved ones in the event of your death or illness?

What protection does your family need in the event of your illness or death?

If you have been following this series you will have already taken charge of your savings and considered your plans for retirement. Now it’s time to ensure your family is adequately protected.

While building up a rainy day fund through your savings is essential, it’s unlikely to be enough in the event of a truly unfortunate and unexpected event such as a death or serious illness, which can prevent you working. So if you’re seriously committed to getting your finances shipshape in 2015, it’s important to consider how well protected you and your family are.

Protect your home

If you’re in the market for a new home, or if you have already bought one, it’s likely that you will have, or will be considering mortgage protection.

With this policy, should you die with an outstanding loan on your home, your mortgage will be cleared and the property will pass on to those in line to inherit your estate. This gives you peace of mind. The disadvantage, however, is that the cover declines in line with your mortgage. So, even though you initially receive protection for your total mortgage, 20 years down the line this cover will have reduced significantly. In addition, if you move home after 10 years, and are 10 years older at the time, you might find getting a new policy more expensive.

It is cheap however. A survey from the National Consumer Agency in February 2014 found that a 33-year-old non-smoker could get cover of €250,000 for between €14.56 and €20 a month. A joint life policy (which pays out for the first death and then ends) works out at as little as €11.50 per person per month.

Protect your life

If you have no dependents, mortgage protection may be wholly sufficient – or even unnecessary. With children however, in the event of the untimely death of you or your partner it’s unlikely to be enough.

With term life insurance, your cover is not limited to the size of your mortgage. So, if for example you take out a policy to cover a mortgage of €350,000, should you die when the outstanding mortgage has fallen back to €200,000, your estate will still be entitled to the full amount.

You can also opt for a conversion option on the policy which guarantees you can purchase additional protection in future without having to provide evidence of good health. However, it will cost you about 8-10 per cent more.

The most expensive – and most comprehensive – type of cover available is whole of life insurance. With this product your life is protected until you die and, even if you stop paying into it, the policy will not be cancelled: instead the insurance company will reduce your level of cover.

However, your insurance provider is likely to increase your premiums over the life of the policy. While you can opt for fixed premiums, this will be expensive.

Typically, such cover is for niche cases such as parents who want to ensure a child with special needs is provided for.

Brendan Coyle, protection marketing manager at Irish Life, also suggests that it can be used “quite cleverly” in later life to ensure that any duties associated with your death, or in passing on assets, are covered. While the type of cover you need may now be clear, working out how much you need is a little bit more complex. Typically, it’s recommended that between 10 and 15 times your current annual income is needed to maintain your lifestyle, and this cover should be in place until your youngest child has left school or college.

However, Coyle says most people do not have anywhere near as much cover in place. Claim figures from Irish Life show that the average payout is of the order of €50,0000-€100,000, which puts people at risk of being under-insured.

Irish Life has a calculator (http://iti.ms/1AOQ5g0) which can help you work out your needs. For example, it recommends that a 40-year-old, with annual outgoings of about €25,000 (ie rent/electricity/heating etc), uninsured debt of €6,800, proposed funeral costs of €4,000 and whose youngest dependent is six, would need insurance of €365,000 over 19 years.

It’s also important to incorporate any death in service benefit that may accrue to your spouse from your company in the event of your death. Typically, this is about three times your salary, which can reduce the need for additional life cover.

On a salary of €60,000 for example, the person in the aforementioned illustration would need to get private cover of just €185,000.

The cost of life cover can vary. The National Consumer Agency survey found that a 33-year-old looking for term cover of €250,000 would pay between €19.47 and €23.24 a month.

But according to insurance group Royal London, smokers can expect to pay more than double the cost to non-smokers for their life assurance and mortgage protection policies.

“Our cost analysis reveals that smokers can pay thousands more than non-smokers for the same life policy so, aside from the obvious health benefits of not smoking, there are quite clear financial gains,” says Daragh Feely, broker sales manager of Royal London.

For example, a 45-year-old non-smoker can get mortgage assurance to cover €300,000 for just €43.88 a month; for a smoker, the comparative figure is €90.48. Similarly, a 35-year-old non-smoker will pay €25.72 for term assurance of €250,000 over 30 years compared to €48.55 for a smoker.

In order to be classified as a “non-smoker”, you must not have used any tobacco products, including nicotine replacement products such as patches or chewing gum, in the last 12 months and have no intention of doing so in the future. In some cases you may even be asked to complete a cotinine test.

Women will also find their life assurance has become more expensive, thanks to the introduction of the Gender Directive at the end of 2012, which prohibits insurance providers from charging different prices for men and women. According to Coyle, Irish Life has seen the cost of life assurance for females jump by 17 per cent.

Protect your income

When it comes to protecting your income in the event that you won’t be able to work, you have two options:

1) specified illness insurance;

2) income protection.

Specified-illness (or critical or serious illness, as it is also known) can be bought as part of your life cover, which is known as “accelerated specified-illness cover”, or separately, and it pays out in the event that you are diagnosed with a specific illness covered by the policy. In 2013 for example, Irish Life paid out €56.4 million for 810 such claims, or on average, €69,638 per claim.

While it does offer you peace of mind in the event of a serious illness such as cancer or heart problems, it does not come cheap. The main reason for this is that you are four times more likely to contract a serious illness before the age of 65 than you are to die.

Policies vary from provider to provider, and while some may cover particular illnesses, others won’t. New Ireland for example, covers 47 specified illnesses and 20 partial payment illnesses, but has restrictions on some illnesses. Angioplasty for coronary artery disease, for example, will only result in a payout if it is of “specified severity”.

Most such policies come with several caveats, which can affect the likelihood that they will pay out for you. While the insurance company may offer cover for a wide variety of illnesses, the severity of the case may be a key determinant in whether or not your claim will succeed.

Last year for example, a case came to court whereby an individual with cardiomyopathy got no payment from his insurer despite having critical illness cover for conditions including heart attack and stroke.

If you opt for income protection, you’ll find your monthly payment burden eased somewhat as it comes with the added benefit of tax relief.

Such policies pay out when you are unable to work, which may be due to a minor illness or accident rather than a specified serious illness. They pay a fixed income as long as the policy holder is prevented from working, so the benefit can last a lot longer than a lump-sum received from a critical illness policy.

Another advantage of income protection over critical illness is that it is more flexible – for example it will typically cover you if you’re out of work with depression, which would not be the case with serious illness cover.

As with death in service, your employer may already offer you an income protection type policy, so check first.

Protect your assets

A survey last year showed that 75 per cent of adults do not have a will. While not everyone will need a will, dying without one (intestate) can complicate the inheritance of your estate.

According to the Law Society, under current laws if you die intestate your spouse or civil partner will be entitled to your entire estate if there are no children.

If there are children, then a third of your estate goes to them, and if there are children but no partner, the entire estate will go to them. To clarify your wishes, and ensure that those you leave behind can readily access your estate, it’s worth taking the time to write a will. And it’s not just about your money and assets – another issue that can be addressed in a will is appointing a guardian to take care of your children in the event that both parents die.

Some solicitors don’t charge for wills (possibly because they’ll get a fee at the probate stage), while others may charge in the low three figures. But there are also special offers to look out for.

MyLegacy for example, which helps people leave money to charity, runs a “Best Will in the World Week” every year where you can avail of a consultation for a will for just €50.

Some people may be tempted to get a will form for €3 in Easons or download a draft from the internet. While this may be perfectly fine, it’s hard to argue against getting it overseen by a solicitor to ensure that it stands up in the event of your death.

Before you embark on your will, The Law Society has a guide on wills (http://iti.ms/1AOS0kD) which includes a worksheet to help you work out what should go into your will. Bear in mind: Beware commissions When taking out an insurance policy, be it for life assurance or income protection, bear in mind that you may incur commission on the transaction. And depending on how it’s constructed, you may be paying this insurance fee for quite some time, which means that the policy will cost you significantly more .

Typically, serious illness providers will pay commission to brokers of up to 180 per cent of the first year’s premium; between 75-180 per cent for mortgage protection/life insurance; falling back to between 75-160 per cent for income protection.

Where does this money come from? Your payments of course – so avoiding the bulk of these commissions can reap dividends. According to Low.ie, which promises no or low commission transactions, a couple looking for joint mortgage protection life cover of €350,000 could save €4,795 over the life of a policy by opting for a provider that doesn’t earn commission at the full rate.

On serious illness cover, the savings can be more significant, with Low.ie promising savings of more than €7,000 for standalone serious illness cover for a couple of €100,000. But, if you do go down the route of low commission insurance remember that you may not receive advice on your policy, which, depending on your circumstances, you may find essential. Be sure to ask your financial adviser about the structure of commission on the policy you opt for, as there can be a conflict of interest in selling certain policies if those providers pay more commission than others.

Friends First for example, has recently revised the way it pays commission to brokers, eradicating so-called override commission, paid to brokers for selling a pre-agreed amount of new business for a life company, and avoiding paying out all commission upfront. —— 

This article appeared in the Irish Times 27/01/2015 http://www.irishtimes.com/business/personal-finance/what-happens-to-your-loved-ones-in-the-event-of-your-death-or-illness-1.2080059