One of the difficulties with people being aware of the correct levels of cover they should have, is that it often only becomes important at the time of a claim, and at that stage, it’s too late to do anything about it. Let’s face it, spending time arranging things like life cover, serious illness cover or income protection, are not usually high on people’s list of favourite activities. However, taking a little time to get things right, can prevent so much devastation and hardship, in the unwanted event of a claim (and can also make sure you are not vastly overpaying for something that you haven’t reviewed in years!)
I see so many examples of people with inappropriate levels of cover, both way too much and way too little. The main reason is lack of understanding about how to calculate financial loss that would be suffered in certain events, for someone’s own, specific circumstances.
Let’s take a couple, “John” and “Mary”. Both aged 35. They have 2 children aged 2 and 5, they have a mortgage that costs them €1,200 per month which is protected with mortgage protection life cover, no other loans and no savings. John’s net monthly income is €3,800 per month and Mary is not in paid employment. He has no pension in work or associated benefits. In the event of John’s death, the mortgage would be cleared with the mortgage protection. Mary would no longer have John’s income coming in but (assuming they were married) would be entitled to a Survivor’s Pension of €267.10 per week (€1,157.43 monthly equivalent). With no longer a mortgage to pay, there is still a shortfall of over €1,400 per month, to maintain the existing lifestyle, continue to pay bills etc. (For the purpose of this exercise, this is a very simplified example, as many other factors may need to be considered). To provide this shortfall, up until the youngest of the children in theory has finished third level education, this would need to be provided for about 20 years, needing a life sum assured of about €336,000. In reverse, if Mary passed away, John would either have to give up working or pay for extensive childcare and associated costs, needing approximately the same level of cover required for Mary.
Note: If they were not married, there is currently no right to a survivor’s pension, meaning the financial loss that would be suffered is even greater. (See earlier blog – Unfair Taxation of Cohabiting Couples) This is one example of how important it is to consider your own personal circumstances.
While taking the time to review these areas may not be anyone’s favourite pastime, doing so can be one of the most valuable exercises you can do. It can also give you peace of mind that you have the most appropriate plans in place for your current circumstances and are getting the best value available. Just don’t make the mistake of putting it on the long finger or it may never get done.
Dave Kavanagh QFA has been a Financial Adviser for over 20 years (and a Gym Instructor/Nutrition Adviser before that!) He has done advice slots on RTE 2FM and on TV3 and does the “Ask the Expert” Financial Advice section on mams.ie and has spoken on Financial Wellbeing at all of The Full 360 events around the country with Alison Canavan. For more information on this topic, just send an email and remember, with Financial Companion, there is no cost and no obligation to arrange a review or get a quotation. Contact us to find out how simple it is.