Before we start, let’s think about why you need life insurance.
Life insurance provides a lump sum death benefit payable to our beneficiaries.
We should carry two types of life insurance:
- Mortgage protection – ensure our mortgage is paid off should we pass away unexpectedly
- Life insurance – additional lump sum benefit
The additional life insurance helps replace our expected future earned income to help with some of (but not restricted to) the following:
- Debt – loans and credit cards
- Child care costs
- Children’s education costs
- Ongoing expenses associated with a living household
- Ongoing costs so your family can maintain their standard of living
No one likes to think about death and life insurance and potential consequences, it’s kind of a taboo subject but it’s REALLY important. I can’t emphasise enough how important it is.
Particularly for those of us with financial dependents.
Close to home, just this week, an old school friend of mine, someone who I went through primary school and secondary school with passed away.
Aged 41 with a young kid. Family commitments.
Protection arrangements are the foundation of any sound financial plan.
It’s important you have life insurance, and when you do have it, you should review it, regularly.
Review Your Existing Life Insurance
You’ve got life insurance, why you should review it
In the past, it’s likely you took out a life insurance policy, typically with a bank or salesman.
Your direct goes out your bank every month and you never give it a second thought to re-assess the policy or review it.
But as with your other insurances like car, home or pet insurance, you should review any life insurance policies regularly.
As time drifts, your circumstances change, you may require more cover, less cover or be paying too much.
Below is a few instances outlining why you should review your life insurance more regularly.
Change of smoking status
Number one and most important.
In some cases, smokers can pay as much as twice the cost for life cover as non-smokers.
If you were a smoker when you took out your life insurance (or income protection) you will be paying smoker rates.
If you have ceased smoking for over 12 months, it’s worth reviewing your existing costs and cover requirements.
There is potentially a cost-saving to be made.
Marital Status
Since taking out your policies, have you married? Divorced?
If you have married you should get a proper assessment of your requirements done jointly.
Your initial assessment would have been carried out when you were single.
Since marriage do you now have children who are financially dependent?
If you are no longer married you are now the sole earner, do you have children dependent on your income?
If so, what would happen if your income stopped?
In this instance, you should review both your life cover and income protection requirements.
Discuss Your Life Insurance Requirements
Children
Have you recently had a baby? Do you have more children now than when you took your cover out?
Are you expecting a baby?
Your family is growing, congratulations.
Children come with responsibilities.
As parents, we have a responsibility to our children to ensure they are financially secure should the worst happen to us.
Again, we don’t like to think of this but it can happen to anyone.
Go back to the introductory paragraph, an old school friend of mine, age 41.
Yes if we carry mortgage protection the mortgage will be clear but we have to provide an additional lump sum to cater for the ongoing day to day financial needs of our children.
Buying a house or moving home
If you are a homeowner you likely took out mortgage protection from your bank.
This is an old trick by the bank, they don’t provide you with all relevant information.
What your bank didn’t tell you is that they are tied to one provider for their life insurance.
What they also didn’t tell you is that you can shop around for your mortgage protection cover.
You don’t have to take it out with them.
In the overall picture, Mortgage Protection cover is not enough cover on its own.
Just because the mortgage will be clear doesn’t mean your family will be financially sound.
You should hold:
- Mortgage protection cover to ensure the mortgage is clear in the event of death and
- A separate life insurance policy to provide a lump sum to your family in the event of death
Change of employment
Your ex-employer could have potentially provided Death-in-Service life cover benefit.
If so this is typically a multiple of your salary.
Have you changed your job and lost this benefit? It should be replaced.
One of the main reasons we change jobs is for an increase in salary.
If so, an increase in salary means you have more income to replace on death and a cause to review your life insurance requirements.
You’ve started a new business
Very similar to the ‘Change of employment’ reason above, if you’ve started a new business, some of your previous employment benefits may have fallen off.
Additionally, whether you’re a sole trader or a Limited Company, your life cover can be set up tax efficiently and be paid from before-tax income.
You’ve never reviewed your cover
Over the years you’ve taken out a number of policies.
You may have your mortgage protection cover sold to you by your bank.
On top of that, you may have additional life insurance policies that have never been reviewed.
What you have to know:
- You may be paying too much for your mortgage protection
- Potential to be over-insured on your life insurance policies and paying too much
- You could have joint life cover (policy ceases on payment on first death) where you could now get dual life cover (dual life both lives are covered completely independently with their own cover)
One to watch, co-habiting couples
If you are a cohabiting couple, reviewing your life cover is really important.
Technically, in the eyes of Revenue, you are strangers for inheritance tax purposes.
This means your inheritance tax threshold between each other is a meagre €16,250.
Should one of you pass away and assets are received by the survivor valued over €16,250 you will get a tax bill of 33% times the balance.
A simple example, a life insurance benefit of €100,000, €16,250 is tax-free and €83,750 is taxed at 33%.
This would create a tax bill for the survivor of €27,637.50
There is a specific way to set up life insurance for cohabiting couples to avoid this and it’s really important it’s checked.
What you need to consider
When it comes to reviewing your life insurance need, there are two main things to consider:
Firstly, how much debt and what liabilities do you have?
This can also increase or decrease over time and it’s important to keep on top of this and ensure you are not underinsured for your liabilities.
Secondly, be aware of all your financial responsibilities.
Not just currently, but expected future financial responsibilities.
As an example, if you have children, consider childcare costs and future education cost expectations.
How we help
We are happy to review anyone’s existing life insurance or income protection arrangements.
In fact, we have a second opinion service designed specifically for this type of situation.
We will review all arrangements you have in place and provide our honest opinion on their ongoing suitability.
Give me a call on 086 0080 756, request a callback or drop me an e-mail at francis@fortitdefp.ie.
Francis McTaggart CFP® SIA RPA QFA
Disclaimer: All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice.
You should always engage the services of a fully qualified financial planner before entering any financial contract.
Fortitude Financial Planning Ltd will not be held responsible for any actions taken as a result of reading these blog posts.
Production