Educating employees about financial topics such as life insurance is a central objective of Employee Financial Wellness initiatives. Insurance is a service that is not only desirable but often mandatory. As far as financial wellness topics go, life insurance therefore poses a common denominator for employees.
When addressing life insurance as an employee financial wellness topic it’s important to start with the basics. In my first article in this series I looked at the various factors that determine the pricing around life insurance products. You can read it here.
That’s all well and good if the only thing that is of concern when it comes to life insurance is a price comparison. But what are you comparing it to? Employees will also need to understand if their insurances have been structured correctly or indeed quantified correctly.
So, in this article I want to delve a bit deeper into the area of life insurance to look objectively at the main life insurance needs that exist. Improving employee financial literacy around the subject of life insurance needs will help them to determine what is and isn’t appropriate for their individual circumstances.
Life insurance Needs v Wants
Like most purchases we make, we decide if we would either like or need that item. Then we attach a value to it and decide whether we can afford to have it or indeed live without it.
Life Insurance is no different. But the mistake lots of us make is we simply look at what we have already and then see if we can get the same level and type of life cover cheaper from a different provider. This is the wrong approach.
Let’s flip this on its head and look at what you actually need cover wise instead of what you already have.
There are three main life insurance needs that you are likely to have.
One of the core protection needs that cemployees have is to clear a mortgage balance in the event of either mortgage holder passing away during the term of the mortgage. In essence this will ensure that there will always be a roof over your family’s heads should the mortgage holders pass away during the mortgage term. Mortgage protection policies are policies that the benefit reduces over time and typically they only pay out in the event of the first death of the two people insured.
Often banks and providers will try to sell serious illness cover as part of this cover but this is not a practice I agree with. I believe that if you are to have serious illness cover in place then it should be separate to mortgage protection.
In terms of quantifying the need simply look at your outstanding mortgage balance and the remaining term. This will ensure your mortgage is cleared at any time during the term of the mortgage.
2. Family Cover Insurance
The need here is a simple one.
If in a typical household there are say 2 children and 2 earning parents, you should consider that there are 2 incomes feeding 4 mouths. If 1 of those incomes was to suddenly vanish then there leaves behind a significant loss of future income to that household.
Family life insurance is designed to replace the value of that future income. It’s important to look at the age of your youngest children and look at how many years they will be dependent for. Typically in Ireland that means a whopping 25 years of age (have mercy on us parents!). If you have kids under this age range then calculate the figure by taking your youngest child’s age from 25.
In terms of the type of cover I am a believer in dual life cover with a conversion option. Avoid reviewable whole of life plans. I don’t believe they are fit for purpose.
A dual life plan covers both individuals with separate pots. The conversion option means that should you wish to extend the term of the policy at any stage throughout the term of the policy you can start the policy again without having to be medically underwritten again. New policy, new price, new end date just no medical questions this time.
To quantify life insurance a method I use is to look at your annual salary after tax. Consider how much is allocated to your mortgage and how much a widows/ers pension would replace. Typically, the balance might be say €20k for say 15 years. This leaves us with a life insurance need of €300k.
Now if I handed 300k in cash to your spouse it’s not designed to be spent all at once. This can be invested and grown to ensure it lasts.
Either way life insurance, when structured correctly, can ensure that your family won’t endure any financial shocks should the worst come to the worst.
3. Inheritance Planning
A life insurance need which is often overlooked is the need for life insurance to cover a tax bill for inheritance. Now this typically only relates to individuals with a higher net worth than most of us as when they die their kids will usually inherit their assets.
This often leaves an unwanted inheritance tax bill which must be paid very quickly after the death of the parents. Often when the kids of the deceased inherit the family home and don’t have the cash to pay the inheritance tax they can be forced to sell the family home just to pay the tax due. Hardly ideal.
A solution I’m happy to recommend is to insure your parents for the expected tax bill. The Revenue in Ireland has granted a tax break to this type of inheritance planning insurance – known as Section 72.
This type of insurance is becoming more and more popular as house prices increase in Ireland.
Quantifying this type of cover is a little trickier, but suffice to say it normally makes a huge amount of financial sense to insure your parents instead of paying a hefty inheritance tax bill down the line.
Understanding life insurance needs is critical for employee financial wellbeing. This article has introduced the three main life insurance needs and will help open the conversation. If you have any specific questions arounf the area of life insurance that you’d like to see addressed here in the Employee Financial Wellness blog please feel free to leave a comment below. Meanwhile sign up to our Employee Financial Wellness newsletter to get more tips, articles and guides.