October 12, 2011 at 10:33 am #13114Financial CompanionParticipant
The big life cover giveaway from Irish Life has prompted a few questions about cover, particularly after people used the online calculator to see where they stand. It’s not unusual for people to see figures in hundreds of thousands quite daunting and difficult to equate with a weekly or monthly wage.
To help you understand where you are with your own circumstances, I thought the following would help shed a bit more light on such an important topic:
When we calculate the financial loss that would be suffered in an event, such as an unexpected death, we consider a number of factors. For the sake of an example, "Joe and Mary" are 34 years old and have two children aged 3 and 6. Joe is employed in a large company and he is a member of the company pension scheme. His net (take-home) monthly income is €3,800. Mary is not in paid employment, she is a homemaker. They have a mortgage of €200,000 and are currently paying €1,200 per month including their mortgage protection insurance (life cover). They have an additional life cover policy with level term cover of €120,000. They also have a car loan of €15,000 and €5,000 owing on their credit card. If Joe was to pass away, the mortgage will be cleared, his death in service benefit from his pension (assuming 2 x basic salary, can be up to 4 x) will be paid out as a lump sum and Mary and the children will receive a spouses and children’s pension (this can vary greatly, for the example we will assume a quite typical scenario in a defined benefit scheme) of 1/5th of Joe’s basic salary.
So the first thing to examine is the financial loss on a regular basis. All of the €3,800 is not necessarily required as the mortgage will now be cleared. However, there could be semi regular expenses to pay for things that Joe may have done, such as occasional child minding, taxis, home maintenance etc. Typically, this may require a monthly income of €2,800. We then reduce this figure by the amount of the spouse’s pension bringing it to approximately €2,000 per month. The age of the youngest child then dictates how long this monthly amount would be required before reducing down to a lower level. Allowing for a period of dependency up to age 25 (impossible to pin point but could be 19, 23 or older) €2,000 x 12 x 22 = €528,000. Next we deduct the death in service benefit of approximately €120,000 bringing the cover required down to €408,000. Their additional life policy of €120,000 further brings down the required shortfall to €288,000.
A similar calculation on the financial loss in the event of the death of Mary, will often allow for a similar loss due to the cost of childminding (or Joe giving up work completely to take on that role) except in Mary’s case, there will be no pension paid out and no death in service lump sum, so quite often, there is a need for more cover on the homemaker, especially when children are younger.
Remember, the €288,000 is not designed to be a big spending sum, it is simply to allow Mary and the children continue a basic lifestyle where they can afford to pay bills, keep a car going, feed and clothe themselves and maybe have a holiday once per year. It simply prevents their current standard of living from becoming unbearable and unmanageable. Assuming they are both non-smokers and in relatively good health, a 22 year guaranteed term plan covering them both for €250,000 (approximately all of their shortfall) will cost them less than €8 per week. They may already be paying over the odds for their existing cover (particularly if they took it out with their bank when getting a mortgage!) and so they may not have to pay any additional amount at all.
Sadly, many people do not consider the importance of examining this kind of topic until it is too late. As mentioned in a previous thread, people will usually spend more time choosing a new mobile phone than making sure that their family is catered for in such an eventuality.
Feel free to ask any questions or post comments. If you have a personal question, for confidentiality please PM me and I will get back to you.
I hope that’s of some help.
Dave.October 12, 2011 at 9:35 pm #117375chewieodieMember
I find this extremely helpful, and explained in a way that makes sense. Granted, I do have a background in insurance, but regardless of that, I think you’ve explained in a way that will make things clearer to folk.
As always, a fabulous source of info Dave, thank you… 😉October 13, 2011 at 9:23 am #117383Financial CompanionParticipant
Thanks Chewie, hopefully it will help people understand how to look at their own situation but if anyone has questions, I’m here!
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