What is Life Insurance:
Types, Differences & Benefits Explained
When it comes to insurance of any kind, it’s easy to get confused. While some policies are mandatory, like mortgage protection or car insurance, others are more nuanced – with lots of different options available. Here, we’ve put together a complete guide to life insurance, from the various types available to the general benefits, and of course – who should have it.
What is Life Insurance?
First up, what exactly is life insurance? Well, this kind of cover pays out a lump sum of money if the individual(s) insured die within the term of the policy. A life insurance policy is typically taken out to protect your loved ones, so that if you should pass, there will be funds available to give them additional financial security without your income.
Benefits of Life Insurance
Life insurance policies have many benefits, from protecting the homeowner with mortgage protection, to safeguarding business owner with key-person cover. However, the main benefit and catalyst for many people taking out life cover is to protect their family and loved ones. With the cost of living in Ireland continuing to rise, have you considered how your family would manage to cover their costs if the unexpected happened.
· Car loans
Medical bills
· Insurance, example Car and Home
· Pensions
· Childcare, School and ancillary activities (holiday camps, sports clubs etc) fees
· Educational fees such as school, grinds and university
· Private healthcare eg. Irish Life VHI, Laya,etc.
· Grocery bills
· Clothing and footwear
· Holidays
By starting a plan, you can rest assured that your family will be more financially secure if something happens to you, particularly at a time when they are under immense emotional pressure.
Who Needs Life Insurance?
Life insurance is particularly important for anyone who has people depending on them financially.
It should be a key part of your financial planning, offering peace of mind and security knowing that your loved ones will be more financially secure if something happens to you, helping to repay loans, cover living expenses and ultimately safeguarding your families financial future.
What are the Different Types of Life Insurance?
There are two principal type of life insurance cover, ‘decreasing term’ and ‘level term’.
Mortgage Protection (also known as Decreasing Term Cover)
This is mandatory cover that a Lender requires you to have in place before you draw down your mortgage loan. It’s ‘decreasing’ because as you pay your monthly mortgage repayments, your life cover amount decreases as well. Mortgage protection helps to protect your loved ones by paying a lump sum to help pay off your mortgage if you die during the term of the plan.
Level Term Life Cover
Level term cover meanwhile ‘does exactly what it says on the tin. In other words, your cover stays at the same amount for the whole of the policy term. For example, imagine Julie and Andy have a young family and take out €500,000 of level term life insurance for 30 years. If at any stage over that time one of them should pass away, the life company will pay out the full €500,000. It is often referred to as ‘life insurance’, and cover can be taken out on a single, or dual life basis.When taken out on a dual life basis, the policy continues in the name of the survivor. You also have the option to add certain benefits, such as indexation which allows you to increase your cover every year (to keep in line with the cost of living) without the need to provide additional evidence of your health.While "Level Term Cover" and Mortgage Protection are generally the most common types of cover taken out, there are other important types of cover described below.
Pension Term Assurance
Most people plan on working until they retire. Pension Term Assurance is a type of life insurance that pays a lump sum to your dependents upon your death if you die before you retire. This could help them to pay bills and other expenses. You can take out Pension Term Assurance if you are self-employed or in a non pensionable employment. Pension Term Assurance is approved by the Revenue Commissioners which means you may be able to claim income tax relief on the premium that you pay.
Serious Specified Illness Cover
Specified Illness Cover provides you with peace of mind by offering financial support if you are diagnosed with a serious or life threatening illness. This type of cover pays out a lump sum upon diagnosis of certain conditions helping to ease the financial strain if you are unable to work.
Standalone Specified Illness Cover
Cover can be taken out on its own without life cover.
Independent Specified Illness Cover
Cover can be taken out alongside life cover; however it operates separately from your life cover, meaning that any claim made under this cover will not reduce your overall life cover,
Accelerated Serious Specified Illness Cover
Specified illness cover can be combined with your life cover on what is known as an accelerated basis. If you are diagnosed with a specified illness covered by this policy, you receive a lump sum payout and this reduces your life cover by the same amount.
Example: Imagine Mary has €200,000 life cover and €75,000 accelerated specified illness cover. Mary is paid €75,000 for her specified illness claim. She has no specified illness cover left and no option to claim an additional payment. Mary will have €125,000 life cover left after her specified illness cover claim is paid.
There’s also a crucial distinction when ‘accelerated specified illness cover’ is taken out with mortgage protection. The claim amount is NOT paid to the claimant who’s suffered the illness but is paid instead to the bank and used to reduce the mortgage loan by the relevant claim amount. This is important, because many people automatically assume any type of specified illness cover claim will be paid directly to them to help them cope with the illness.
Income Protection Insurance
‘Income protection’ pays out a regular monthly income for you and your family if you’re unfortunate enough to be out of work due to an illness, or injury. It’s important to note though that you are not covered if you become unemployed, rather it provides regular income if you are unable to work due to medically certified ill health. You can get ‘income protection cover’ for up to 75% of your yearly earnings, less any benefits from the state or other income sources available to you. If you’re self-employed, you may not qualify for any state illness benefit, so your income protection may be especially important. After a certain period, known as the deferred period, you receive the benefit to replace some of your income while you are off work. You choose the deferred period you want - 13, 26, or 52 weeks.
Under current tax law, the premiums you pay for your income protection cover are eligible for tax relief. This can reduce the cost of your cover by up to 40%, if you pay income tax at the higher rate.
Business Protection
Every business takes great pains each year to make sure they have the most appropriate insurance in place to look after their office, premises, stock, employers’ liability etc. However, many neglect the protection side which is covered by the following appropriate types of cover:
·Keyperson Cover
‘Keyperson cover’ is simply life insurance taken out by the company on the life of one or more employees who they view as being vital to the business’ continuing success and viability. Having this cover in place helps to ensures that the company can cope if a key employee passes away. For example, replacing loss of revenue if the individual was a big sales producer.
·Shareholder Protection
Shareholder protection is life insurance that is taken out to protect both business owners and their families, in the event of the death of one of the business owners. Life cover is effected on the shareholders and the proceeds of this life cover are intended to help the surviving owners to buy back the share of the business that belonged to the deceased shareholder. This enables the surviving shareholders to retain control of the business. It means a company can continue its operations with minimal disruption, while also helping to ensure the deceased’s next of kin get the value of the their loved one’s shareholding.
·Partnership Insurance
This is a similar policy, but only relates to partners, eg. in a law firm or accountancy practice. Partnership Insurance pays out liquid capital on the death of a partner to enable the surviving partners to make an immediate payment to his/her estate in respect of their share of the partnership.
Which is Best for You and When?
There are a number of factors to consider when contemplating purchasing life insurance, and these really tie into what stage of your life you’re at, and what responsibilities you have at that time. The first step on the life insurance ladder for many is when they start having a family, and they’re looking to protect their dependents. This often prompts new parents to put life insurance cover in place for typically 20 - 25 years, ie. to get their kids through school and third-level education until they’re self-financing and ‘off the payroll’. Once that type of cover finishes, there may be no requirement to take out any further policy. But when you reach this stage of life, there’s often other events which come more sharply into focus. For example, parents thinking ahead and looking to see how they can minimise inheritance tax for their dependents, via what’s called a Section 72 Whole of Life Policy.
Whole of Life Cover
This type of cover does'nt expire after a fixed term and cover continues after death once you keep your payments up to date. Your beneficiaries will receive a lump sum upon your death to help them with expenses, for example funeral expenses. It can also be used to provide tax efficient inheritance cover for your family.
Section 72 Whole of Life Policy
This is a Revenue-approved, ‘Whole of Life’ policy where the proceeds are tax-free if used to pay an inheritance tax bill. Designating ‘Whole of Life’ cover as a Section 72 policy enables people to plan for the payment of inheritance tax efficiently and in advance.
What is Life Assurance and How is it Different from Life Insurance?
Unlike life insurance (which is protection for a fixed term and an event that may or may not happen), life assurance is against an event that will happen eventually. Therefore, with life assurance, payment will be made at the end of the policy when the life assured person dies. This type of cover is done via a ‘whole of life’ policy.
Life Insurance vs Life Assurance Policy Costs
Finally, the one factor that holds sway across any life insurance / life assurance decision (and indeed, across all types of insurance) is the important issue of cost. Ultimately, we should only get cover that we can afford. ‘Whole of Life’ cover is generally more expensive than ‘Term Cover’, for the simple reason that it lasts your lifetime.
What affects your Life Insurance Premium and Costs?
The cost of your cover depends on your age, heath, smoker status, amount of cover and how long you want to be covered for. For all types of cover it is important to note that you must keep paying to stay covered.
Do I need Life Insurance if I already have Mortgage Protection?
Mortgage protection is required by your lender when you take out a mortgage with them. The level of cover decreases as the amount left on your mortgage decreases. It tends to be the first step on the life insurance ladder, as buying a house is costly and finances can be tight. Should it be unfortunately triggered by the death of one of the policyholders, it will pay a lump sum to help pay off your mortgage. However, the remaining policyholder and any dependents may face significant financial hurdles with a parent gone. This is why it’s worth considering other life cover as well as mortgage protection.
How much is Life Insurance?
Life insurance is based on your age, smoker status health and the amount and term of cover required. Naturally, the younger you take out cover the cheaper the cost, but typically it’s not till our late 20’s /early 30’s that we usually consider it.
How to Get Life Insurance with SuperValu Insurance?
Are you interested in taking out a life insurance policy? Get in touch with our team today, if you want to find out more, or get a quote for Life, home, car or travel insurance here.
