Liam Croke: Think carefully about your level of life cover

Having adequate life cover in place plays an incredibly important role in protecting families from the financial burden placed upon them in the event of a loved one dying.

Having adequate life cover in place plays an incredibly important role in protecting families from the financial burden placed upon them in the event of a loved one dying.

We all know someone that has had a loved one die, or someone who suffered a serious illness and had insufficient cover to replace their income.

What happens then? They have to try find a job to make ends meet, borrow money just to get by or worse exhaust what savings they have on their mortgage, utilities and so on, so the moral of the story really is: make sure this doesn’t happen to you or your family

One of the “laws of money” is called the “Law of three” and what it refers to is, that if you want to achieve financial independence or improve your financial well-being, you need to focus on the three things and consider them each being a leg of a stool:

Investing

Debt elimination

Protection

So having adequate life cover in place is as important as having a debt elimination strategy in place or a savings one as well.

For one silicon valley billionaire, it was very important because he took out the largest ever life policy written in the amount of $201 million which needed 19 insurance companies to be involved in in order to spread the risk.

Why would a billionaire require life cover in the first place? It is a good question and I can only presume Mr. Billionaire owed quite a bit of money as well and the proceeds of his life policy would be used to pay down debt; it wouldn’t make sense for anything else.

Billionaire or not we all share the same financial risks albeit on a smaller scale so here are three tips to help you choose the right policy for you, should you need life cover.

Get cover that is appropriate and meets your needs over time

If you take on a mortgage then you will need a policy that will last for the term of the loan and the type of cover should reduce along with the amount you owe to your lender.

Keep it simple and get a basic decreasing mortgage protection policy nothing more.

If you have children then you will need additional cover for them as well but you will only need it until they are financially independent from you.

So, don’t take on a “whole of life” policy take out a term policy where your premiums will remain the same and your policy will come to an end in 20 or 25 years’ time.

And with any policy you take out make sure your premiums are based upon a zero commission basis;.

Don’t end up paying more than you need to and just in case you might want to extend the policy or increase the amount of cover choose a “convertible option” which allows you to do this without having to provide any medical evidence when and if you want to.

This means that the life company has to automatically accept you for cover regardless of your health.

Watch out for life policies where part of your premium is invested in managed funds

Some brokers advise their clients that they should be taking out life policies that are referred to as “whole of life” policies.

Primarily they do this because the premiums are higher and continue to get higher as you get older and in turn they get more in commission.

Although this type of policy is not altogether bad (essential in fact if you wanted a policy that would cover the cost of an inheritance) they come with an added cost which comes later when your policy is up for renewal and your life cover either has to go down or your monthly premium has to go up.

It’s a bad idea to mix the two so keep them separate – if you want a life policy then take out a life policy, if you want a savings plan then take out a savings plan.

Who owns the life policy is incredibly important

Most people have life policies that are just in their own names and if they were to die, the proceeds of the life policy would go into their estate and eventually to their loved ones.

However if they have not made a will, their estate would have to go through probate and it could take up to 12 months before their family get access to the life assurance policy.

How you avoid this is taking out a life policy where you are the life assured and your partner is the policy owner (and pays the premiums) because if this was the case and you died, then, will or not, once a death certificate is provided to the company, the proceeds are released within a matter of days.

You don’t have to wait for a grant of probate to be completed which could take six to twelve months before you get the proceeds of the life policy.

The premiums remain the same the term remains the same nothing changes except you are arranging the policy in a much smarter way.