Written by DLS Capital Management based in Dublin 2
Individual protection needs vary from person to person. Personal circumstances will determine an individual’s need for a type of insurance and the level of cover they require. In the current market place, there are many difference types of insurance policies with many people asking themselves which cover will I need if I get sick or which cover will I need for my family if I die? The main focus of this article is to provide a breakdown of the main types of protection policies to assist clients in deciding which cover may be suitable for them.
What happens if I get sick?
There are two main types of insurance policies that individuals may take out in the event that they may become ill. The first is Income Protection Insurance and the second is Serious Illness Insurance. Income protection insurance pays out a regular cash payment that replaces part of your lost income if you can’t work due to a medium to long-term illness or disability. It can also be called ‘permanent health insurance’ (PHI) – but is not the same thing as private health insurance. Serious illness insurance pays you a tax-free lump sum if you are diagnosed with one of the specific illnesses or disabilities that your policy covers. It is also sometimes called ‘critical illness cover’.
Income Protection Insurance
Income protection Insurance provides you with a replacement taxable income if you cannot work as a result of an illness or injury after a certain period of time. You can only take out income protection if you are in full-time employment or are self-employed and earning an income. It is important to point out that this cover protects you only in these circumstances – it will not be paid if you become unemployed. The policy pays you a regular monthly income, replacing some of your earned income and the cover continues until age 60/65 or until you return to work. The level of cover a personal can take out is limited as follows:
- The maximum benefit payable is now €250,000, previously this was €150,000. Benefits paid are less any State benefits.
- The maximum benefits payable is 75% of total yearly earnings, less any State benefits
Contributions paid by an individual to an approved Income Protection Policy are deductible against their income tax liability at their marginal rate of tax (i.e. up to 40%). However, they do not qualify for PRSI or USC relief and the income tax relief is limited to the extent that the premiums do not exceed 10% of your total income in the relevant year.
Serious Illness Insurance
Serious Illness Cover is similar to Income Protection Insurance but the benefits operate in a different manner. Serious Illness cover provides a lump sum payment on the diagnosis of an illness specified under the policy. There is no tax relief on Serious Illness premiums but the lump sum payment is tax free. It is very important when making a claim under a Serious Illness policy that the illness has been diagnosed and supported by an appropriate report from an approved medical practitioner. Some of the illnesses that one might expect to see covered are heart attack, cancer and stroke. Given that a vast number of serious illness sufferers may actually die from their disease, most policies stipulate that an individual must survive for 14 days after diagnosis of the illness for it to be considered a valid claim.
One of the most common ways to take out serious illness cover is to include it as an extra benefit on a life insurance policy or a mortgage protection policy. Taking out serious illness cover as an add-on will increase the cost of a life insurance or mortgage protection policy considerably, up to four times the cost in some cases. The extra cost will depend on whether the cover is:
- additional (separate) cover
Accelerated means that the policy will pay out if you are diagnosed with one of the listed serious illnesses or if you die within the term of the policy. It would not pay out twice unless you only receive part of the benefit if you are diagnosed with one of the serious illnesses listed on your policy. Some accelerated serious illness policies let you choose a lower level of cover for the serious illness part of the policy than for the life insurance part.
What happens if I die?
There are many different types of insurance policies that an individual can take out to insure their lives in order to provide for their dependants in the event of their death. These policies differ in relation to the term of the policies, the level of cover insured, the payment of the premium and the payment of the lump sum. The main types of life insurance policies are Mortgage Protection Insurance, Term Life Assurance, Whole of Life Cover and Death in Service.
Mortgage Protection Insurance
Mortgage Protection Insurance, sometimes referred to as mortgage life insurance is the most common form of life insurance. It ensures that your mortgage will be paid off in the event of your death during the term of your policy. In most cases an individual is legally required to take out a mortgage protection policy prior to a financial institution granting them a mortgage on a principal private residence. Some exceptions to the legal requirement are individuals who are over 50, individuals who cannot get insured for medical reasons or those who have other sufficient life cover in place to cover the amount of the mortgage. While recommended, it is also not a legal requirement for individuals with mortgages relating to investment properties.
Mortgage protection is payable on a joint life, first death basis. This means that the mortgage is repaid on the death of the first borrower if a couple have taken out a mortgage together. The term on the mortgage protection policy is typically the same term as an individual’s mortgage. The level of cover on the policy decreases over the term of the policy in line with the level of an individual’s mortgage and the premium remains the same over the term of the policy.
This type of Insurance policy is taken out for an agreed fixed term, e.g. twenty years. It will pay an individual a fixed lump sum in the event of their death during the term of the policy, or on the first death on a joint policy. Typically, individuals with families will hold this form of cover until retirement age. This type of insurance is often held in addition to mortgage protection insurance. While the lump sum received under the mortgage protection policy is specifically used to repay the outstanding mortgage, the lump sum paid on a term assurance policy is paid directly to the insured’s family for their own use.
Term Assurance can be taken out on a level term basis which means the premium and the level of cover insured remains the same for the period of the policy. Individuals also have the option to take out increasing term assurance which means that both the premium and the level of cover increase annually over the term of the policy. The rate at which the premium and the level of cover increases varies among Insurance Providers.
Whole of Life Cover
The main difference from Term Assurance is that Whole of Life Cover does not have an end date on the policy. This policy is designed to insure an individual for their whole life, thus guaranteeing a lump sum payment from the policy eventually. There are two main types of whole of life cover; reviewable and guaranteed whole of life cover.
Reviewable Whole of Life Cover
This level of cover is reviewed every 10 years until an individual is 60 years old, then it is reviewed annually. It is important to note that the insurance provider may increase the premium at each reviewable date if they feel it is necessary.
Guaranteed Whole of Life Cover
Guaranteed whole of life cover ensures that there is no end date to your policy. In contrast to reviewable whole of life, this level of cover does not require any reviews and has a fixed premium from the beginning of your policy.
Unsurprisingly, given the scope of its cover, whole-of-life insurance tends to be very expensive. A 30-year-old could pay six times more for guaranteed whole-of-life cover (€61 per month) than they would for mortgage protection (€10 per month).
Death in Service
Death in Service is a benefit provided for employees by their employer. It is an insurance policy taken out by the employer which pays out a lump sum on the death of an employee while they are still working. The benefit is set up as a group life insurance policy and the employer chooses the amount of cover at the outset and pays the appropriate premium. Under Revenue rules the maximum lump sum that can be paid out on death is four times salary. Death in Service benefit is not treated as a benefit-in-kind for Income Tax purposes.
The above details are to give you an overview of the different types of insurance policies which may apply to you. The level of cover an individual may require depends on their personal circumstances. One of the services we provide is a “survivor needs analysis” which reviews a client’s outstanding liabilities together with their current income and expenditure to see how much cover they would need to ensure their family are financially secure in the untimely event of their death. Please contact us for further information.