Why it's vital to know the facts of life insurance

Why it's vital to know the facts of life insurance

HAVING financial security for those left behind following the death of a loved one is obviously vital and life insurance plays a very important role in this regard.

Last week, I met a 39-year-old woman whose husband died in November. She has three children under the age of 10, and as tragic as her husband’s death was, he made sure that they wouldn’t ever have to worry about money after he died. This was largely due to them being the recipients of two life policies – one paid by his employer the other arranged by him.

There is something about life insurance that makes people uncomfortable; confronting their own mortality makes them uneasy.

Or maybe it is a lack of knowledge of the subject that discomfits them

I believe the majority of people are clueless when it comes to their life cover requirements. Some think that buying life cover is a waste of money because they don’t see an immediate return, so it’s money down the drain.

This mindset fuels other myths about the life insurance industry. Let’s separate facts from fiction, because you cannot make informed decisions about this incredibly important topic based on hearsay.

So, I want to debunk five insurance myths.

Myth No. 1: I don’t need any more life cover, because I’m taken care of through my job.

Truth: Employers who provide lump sum payments if an employee dies in service is a terrific benefit to have. But you have to be careful to not take for granted that it will be enough. While this benefit may be sufficient if you are single and of modest means, it may not always be the case.

You may still require additional coverage if you have a spouse or dependents.

Even if your death in service benefit is enough now, it’s temporary cover and something you do not want to rely on too much; what if you move employers and your new one doesn’t offer a death in service benefit?

If that happened you would need to replace it by taking out a new policy, and because you are now older the cost will be more expensive. So, should you consider taking out a small, very inexpensive policy right now when you are younger which could be converted to a bigger policy at a later date if needed? I think it is certainly work exploring further.

Myth No 2: Stay-at-home partners do not need life cover.

Truth: It has been proven that the total cost to employ someone in Ireland in 2016 to carry out the household jobs normally carried out by a stay-at-home mum or dad, could add up to around €41,719.60 per annum.

If you are the main or only income earner for your family and your partner passed away, would you be able to handle all the expenses you would require for child-care and other household management issues?

Myth No 3: Single people do not need to have life cover.

Truth: They may not need as much life assurance as someone with dependents, but someone has to cover the cost of their funeral costs, unsecured debt etc.

Their parents, executors or other family members will be forced to deal with monetary issues as well as trying to cope with your personal loss, so you shouldn’t think you don’t need any cover.

Myth No 4: You are better off investing your money than buying life insurance

Truth: Some people think that because there is no immediate tangible return when they buy life cover that it’s a waste of money. They feel its’s a type of scam, because if no-one dies, they don’t get a refund of what they paid into the policy.

So, they think they would be better off providing for dependents by putting money into a savings account instead of a life policy.

If you think this is the case, then you are taking a massive gamble with your family’s future financial well-being.

Let’s say the cost of a life policy in the amount of €200,000 is €50 per month. If you deposited that amount in a savings plan, in five years you would have €3,000 in your account. If you died, how long do you think it would last?

In 10 years they would have €6,000 sitting in your account – how long would your 10 years of savings last them? One, two, maybe three months?

Myth Number 5: A life policy that includes an investment element is great - it hits two birds with the one stone.

Truth: Rubbish. In fact, these types of policies could be disastrous for you.

Basically, they combine a death benefit with an investment component and are quite complicated, expensive, lack flexibility, lack transparency and they carry high commissions for brokers as well.

Here’s the boring bit, but it is important to know: the amount you pay each month for this policy goes into an investment fund which is divided up into units and the value of your policy and the life cover attaching depends on how the price of these units, move.

What happens with the life cover element is that the units are cashed in each month to pay for your life cover. At the start of this type of policy and the younger you are, assuming the investment return is good, the level of life cover can be maintained for the same premium probably for five or 10 years.

However, after that the premiums are likely to go up and the premium is reviewed every five years to make sure the amount you pay each month is enough to maintain the level of life cover. If it isn’t your premiums will go up or your level of cover down.

If you want to have a life policy, have a life policy. If you want to have a savings plan, have a savings plan. But don’t mix them – they don’t go well together.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie

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