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 tax-free 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 you and your loved ones, so that if you should pass, there will be funds available to help them cope with the financial stress of your departure.
Benefits of Life Insurance
Life insurance policies have many benefits across their different facets, from protecting the homeowner via mortgage protection to safeguarding the business owner via keyperson cover. However, the main benefit and catalyst for many people taking out life cover is to protect their family and loved ones. In today’s increasingly costly Ireland, you can imagine the financial carnage if one of the family earners was suddenly taken from this world:
· Mortgage loan (taking out mortgage protection life insurance is mandatory, so this should be cleared if there’s cover in place)
· Car loans if applicable, not to mention house and car insurance
· Domestic bills, such as gas, phone, electricity
· Medical bills, eg. all those trips to GP with kids
· Gym memberships
· Pensions
· School and ancillary activities (holiday camps, sports clubs etc) fees
· Educational fees such as school, grinds and university
· Private healthcare eg. VHI, Laya, Irish Life etc.
· Grocery bills
· Clothing and footwear
· Holidays
Having a life insurance policy in place ensures there’s a lump sum available to help the surviving parent cover all these costs, particularly at a time when they’re under immense emotional pressure.
Who Needs Life Insurance?
Everyone needs life insurance if viewed (which it typically is) in its generic form, as it covers many products including mortgage protection, income protection, serious illness cover, funeral cover, cancer cover, keyperson cover etc.
However, when viewed as the product itself, if you have financial dependents, family or individuals who will be financially impacted by your passing - you need life insurance cover. It should be a key plank in your financial planning, offering peace of mind and security for those left behind; ensuring that loans can be cleared, living expenses covered and ultimately safeguarding your family’s financial future.
What are the Different Types of Life Insurance?
There are two principal type of life insurance cover, ‘decreasing term’ and ‘level term’.
Decreasing Term Cover
Also known as mortgage protection; this is mandatory cover that a bank needs in place before you draw down your mortgage loan. It’s ‘decreasing’ because as you pay your monthly mortgage repayments, your life cover decreases in tandem with it. If you want to learn more about mortgage protection, read our mortgage protection article.
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’s a popular policy and is often referred to generically as ‘life insurance’, but it has many guises. In fact, level term cover can be taken out on a single, joint or dual life basis.
Joint Life Cover
Two people are covered, but the life cover is payable on one death within the term of the policy.
Dual Life Cover
This type of policy is taken out by two people. The fundamental difference is that a claim can be paid on both deaths. If one person dies, the policy continues in the name of the survivor. While ‘term life insurance’ is the most common type of cover taken out, there are two other important types of level term cover; ‘convertible term life insurance’ and ‘pension ‘term ‘cover’, both of which are described below.
Convertible Term Life Insurance
‘Convertible term life insurance’ is where your policy has a very valuable ‘conversion option’. This allows you to extend your cover beyond the term at any time before the expiry of your existing policy, without medical underwriting. In short, you can set up a new policy without having to supply any medical information. It’s typically a bit more expensive but worth it, as sadly our health tends to go into decline as we age.
Pension Term Assurance
‘Pension term assurance’ is designed to provide life cover to those in non-pensionable employment. This includes those who are self-employed or not members of an employer-sponsored pension plan. The key difference with ‘normal term life insurance’ is that with pension term cover, you get full tax relief on your premiums as it’s structured to use the tax relief that’s currently available under pensions legislation. What’s more, you don’t need to have a pension plan to benefit from it! Eligible policyholders pay their full premium to the relevant life company, and then claim tax relief at their marginal rate from Revenue. As such, the savings can be sizable, particularly if you’re a high-rate taxpayer ie. c.40% based on current tax rates. There are two important caveats to keep in mind when assessing whether pension term cover is suitable though:
· You cannot assign a pension term policy.
· Your pension term cover cannot go beyond age 75 with our provider – this is in line with most other Irish life companies.
Mortgage Protection
Mortgage protection is the first type of life insurance most of us buy, as it’s a necessary requirement when you take out a mortgage. It’s very straightforward and is typically inexpensive, as it decreases as your mortgage loan reduces over time. Mortgage protection is the simplest and cheapest life cover available on the market. In technical jargon, it’s ‘decreasing term cover’ because as you pay your monthly mortgage loan repayments, your life cover reduces too.
Serious Illness Cover
A ‘serious illness policy’ will help with the financial burden that ensues if you can’t earn as you used to. This is cover that pays out a lump sum if you get seriously ill, eg. have a stroke, heart attack, cancer etc.
Accelerated Serious Illness Cover
Serious illness can be provided on its own (‘standalone’ cover), or it can be added on in what’s called an ‘accelerated’ basis to life cover or mortgage protection. It’s important to note that when taken out on an accelerated basis, if a claim is made, it will reduce your overall policy cover by the requisite amount. Take Julie and Andy for example again. This time, they have a ‘dual life level term’ policy for 25 years, with both of them covered for €400,000 life cover and €200,000 accelerated serious illness cover. After 15 years, Andy suffers from one of the covered serious illnesses. €200,000 is paid to him. The policy remains in force, and Julie remains covered for €400,000 life cover and €200,000 serious illness cover, while Andy’s life cover is reduced by the €200,000 accelerated serious illness claim, to now stand at €200,000.
There’s also a crucial distinction where ‘accelerated serious 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 serious illness cover claim will be paid directly to them to help them cope with the illness.
Cancer Cover
Cancer cover is a policy that pays out a lump sum if you’re unfortunate enough to be diagnosed with breast, lung, bowel cancer etc. While receiving such a diagnosis is devastating for any individual and their family, the financial repercussions from it are also huge - so having cover like this is very important.
As with any type of cover (but particularly serious illness), many people are nervous that their application will be turned down because the life company and their underwriters consider them too risky. It’s worth noting however that ‘cancer cover’ can be taken out by individuals who would ordinarily be declined full ‘serious illness cover’. This includes people with a medical history of:
· Heart Attacks
· Angioplasty
· Angina
· Valvular Disease
· Stroke
· Obesity
· Diabetes
· Kidney Problems
Personal Accident Insurance
This type of cover protects you in the event of suffering a serious injury as a result of an accident, preventing you from working.
Accidental Death Cover
‘Accidental death cover’ provides for the payment of a lump sum if the policyholder dies directly as a result of injuries sustained in an accident, for example a car crash.
Income Protection Insurance
‘Income protection’ pays out a replacement monthly income for you and your family if you’re unfortunate enough to be out of work due to an illness, disability, injury or accident. It’s important to note though that an ‘income protection plan’ doesn’t cover redundancy. Rather, it provides for replacement of income if you’re unable to work due to medically certified ill health. You can get ‘income protection cover’ for up to 75% of your salary – minus any social welfare that’s paid. However, if you’re self-employed, you don’t qualify for any state illness benefit, so income protection is especially important. Important to note is that when you set up a policy, you choose the deferral period. This is the time duration that you need to be out sick for before the policy starts to pay out. It can be anything from four to 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 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 /Co-Directors Insurance
As the name implies, this cover is only relevant to companies owned by shareholders, as it provides the funds to enable those left behind to buy out the shares of a shareholder on his or her death. A legally binding agreement is drawn up, and one or more life cover policies are put in place. This ensures that funds are available to the surviving shareholders to buy the deceased’s shares, when needed. It means a company can continue its operations with minimal disruption, while also ensuring 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. This life insurance provides the funds to enable the remaining partners to buy out the share of a partner on his or her death. A legally binding agreement is drawn up, and one or more life cover policies are put in place. Again, this ensures that the funds are available to the remaining partners to buy the deceased’s share of the firm.
Which is Best for You and When?
There are a number of factors to consider when contemplating this type of cover, and these really tie into what stage of your life you’re at, and what responsibilities you have at that time. As you can see from the chart below, 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 at that 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 Life Policy.
Section 72 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.
Funeral Cover
Another catalyst for taking out this type of cover when you’re a bit older (and the big zero birthdays are passing too quickly) is to ensure you have a lump sum available when you die to pay all your funeral expenses. This is called Funeral Cover, and it’s a ‘Whole of Life’ assurance policy that has been set up with this sole purpose in mind. Typically, this type of cover will be for relatively small sums, usually ranging from €10,000 to €30,000. It ensures that when the policyholder passes away, all the necessary funeral expenses are sorted and there’s no financial pressure on family or loved ones to have to cover what can be a chunky expense at an emotional time.
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. Life assurance or ‘Whole of Life’ cover is a little more expensive than ‘Term Cover’, for the simple reason that it lasts your lifetime. Given that medical experts are predicting many of us will definitely be around to collect the cheque from Áras an Úachtaráin when we hit 100, ‘Whole of Life’ cover has to be priced by the actuaries to reflect that.
What affects your Life Insurance Premium and Costs?
One of the biggest considerations of premium cost is whether you smoke or vape. If you’ve done so within 12 months of running a quote, your premium will be far higher (close to double) than that of a non-smoker. Other key factors that drive up premium costs are your age and overall health. As we get older our health tends to worsen, so life companies price accordingly. As such, taking out cover when you’re younger is preferable. Naturally, the healthier you are when you apply for life cover, the more beneficial impact it will have on your premium cost, as issues like high BMI, diabetes etc. will unfortunately penalise you on the cost front.
Do I need Life Insurance if I already have Mortgage Protection?
Mortgage protection is ‘decreasing term life insurance’ that’s required by the bank when you take out a mortgage with them. 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, the mortgage loan will be cleared. However, the remaining policyholder and any dependents may now face significant financial hurdles with a parent gone. This is why it’s very important to have a life insurance policy in place as well as mortgage protection.
How much is Life Insurance?
Life insurance is not expensive, particularly when viewed against the amount of cover and financial security it brings. Premiums start from just €10 per month and are based on your age, 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.
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. There are a few key differences between life insurance and life assurance that are important to note before purchasing a life insurance policy
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.
