Life Life Assurance Rule of Thumb

S

spinmaster

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I am in the process of reviewing our (wife and I) life assurance, taking into account debt, death in service benefits etc. Mid 30s, young children.

I read this on the Journal
http://www.thejournal.ie/readme/8-financial-rules-of-thumb-1270162-Jan2014/
Rule of thumb is 10 times your annual salary if you are in your 30s with young children. If you’re in your 40s when children might be a little older, makes it 7 times your annual salary, and, finally, 5 times your annual salary if in your 50s

1. I appreciate that you can never have too much life assurance but does this seem excessive?

2. Does it make sense to have separate mortgage protection (to cover reducing balance) & life assurance or is it best value to combine into one policy?

3. Taking out a 'higher protection' long term 'term life' policy as this stage arguably means we would be over insured in 15 years time based on above rules of thumb. Would it be reasonable to take out a 25 year policy now and review in 10 years time? Or best to take out a 10 year policy with a conversion option? Thanks.
 
You can take out a reducing balance level of cover so that you might have 10 times your earnings now and 5 times your earnings after a few years.

But it depends on other factors as well. If you die, what position would your wife be in? The mortgage will be paid off. Will she be able to earn a living as well? Many, many single parents survive very well.

And vice-versa. You have young children now. But will you need a child minder in 10 years if your wife dies then?

My own view is that in most cases, the money is better spent reducing your debt and building your wealth.

Brendan
 
I have found that an income on death (work out what income your family will be down on your death per month) policy is a cheaper and more accurate way of covering yourself. Take it over a term to get your youngest to financial independence (so if they are 3, get a 23 year term). Add in maybe €10k lump sum cover for initial funeral expenses, add in a conversion option to give you the option to extend cover if need be. At your age the premium should be reasonable.
 
Agree with Jim, the income on death is a much easier way to calculate your needs.

Look at your take home pay - that is the income that has to be replaced - say €3,000 a month
Deduct the amount you pay into the mortgage - say €1,000 a month
Disposable income to be replaced is €2,000 a month. If you have kids, the Widow's pension will pay for €1,000 of that. But if you are going to need childcare, you have to add that on.

Then add on a lump sum. Funerals can be expensive, depending on what you go for. Also remember, the death of a spouse is an extremely traumatic time for the family. You may take time off work and/or bring the kids away for a while, so you need to add some comfort money as a lump sum too.

Life cover is pretty cheap. It is for catastrophe planning. I think on the relatively small amount you pay for cover, it will take a long time to accumulate wealth with it as Brendan suggested (If cover of €300,000 costs €50 a month and you die after 1 month, you get the full €300,000. If you went the wealth accumulation route, you get €50 back).


Steven
www.bluewaterfp.ie
 
SBarrett said:
Look at your take home pay - that is the income that has to be replaced - say €3,000 a month
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This is a common mistake.

You don't need to look at your take home pay. You need to look at the income your spouse would need in the event of your death.


Your take home pay might be €8,000 a month, but you need only €3,000.

She will probably qualify for the widow's pension which reduces it further.

Your take home pay might be €2,000 a month, but you need €3,000.

And you also need to look at your overall wealth. If you are wealthy already, you might not need €3,000 or any life insurance.

Brendan
 
Many, many single parents survive very well.
Click to expand...
Perhaps the OP is looking for a little more than survival. I'd agree with SBarrett, life cover is not that expensive.
 
Why is it not expensive?

Because the likelihood of death is so low.

It might not be expensive,but it's bad value. And you should not buy too much of anything which is bad value.

Brendan
 
Brendan Burgess said:
This is a common mistake.

You don't need to look at your take home pay. You need to look at the income your spouse would need in the event of your death.


Your take home pay might be €8,000 a month, but you need only €3,000.

She will probably qualify for the widow's pension which reduces it further.

Your take home pay might be €2,000 a month, but you need €3,000.

And you also need to look at your overall wealth. If you are wealthy already, you might not need €3,000 or any life insurance.

Brendan
Click to expand...

The two main purposes of life cover is to pay off debt and replace lost income. If you are in a situation where you earn far more than you need, then you don't need to replace the whole amount. It is certainly a better place to start than just picking multiples of salary.


Steven
www.bluewaterfp.ie
 
Brendan Burgess said:
Why is it not expensive?

Because the likelihood of death is so low.

It might not be expensive,but it's bad value. And you should not buy too much of anything which is bad value.

Brendan
Click to expand...

I can't agree with that at all Brendan. The purpose of any insurance is to offset risk. If you want to provide for your family if you die, you always have the option of self insurance. Will you ever be able to create enough spare wealth to do so, especially in the early years when you have a mortgage, creche fees etc. Unlikely. You can always just let them get on with it with no provision. Or you can insure the risk.

Anyone can be in an accident at any time. Knowing that my family will be looked after financially if something did happen to me provides me with a sense of comfort. I hope there is never a pay out, just like I never hope that my house doesn't burn down so I can claim on my house insurance.


Steven
www.bluewaterfp.ie
 
Hi Steven

I would say we are in general agreement on the principles - it's the extent I am arguing about.

If you have mortgage protection, your mortgage will be paid off.

So your wife and kids will be living mortgage-free.

Most single parents would love to be in that position.

For most people, I think that would be enough.

Our attitudes to life cover were developed when women didn't go out to work even after their husband died.

These days most women would go out to work and earn a living and be fairly well off if they didn't have a mortgage to pay.

Brendan
 
Brendan Burgess said:
Hi Steven

I would say we are in general agreement on the principles - it's the extent I am arguing about.

If you have mortgage protection, your mortgage will be paid off.

So your wife and kids will be living mortgage-free.

Most single parents would love to be in that position.

For most people, I think that would be enough.

Our attitudes to life cover were developed when women didn't go out to work even after their husband died.

These days most women would go out to work and earn a living and be fairly well off if they didn't have a mortgage to pay.

Brendan
Click to expand...

When we work out life cover needs, we have calculators that factor in what a family will be up and what a family will be down in the event of death (up mortgage repayments & widows pension, down income etc.). So we just look to replace the net monthly loss (+ as Steven said a lump sum funeral payment). It is relatively cheap because there is a small enough chance of a 30 year old dying within 20 years (but it does happen, I've dealt with 4 or 5 such claims in the last number of years) so why take the chance your family will be financially unstable after your death? All you are looking to do is leave your family in the same financial position they were in before your death. You're presuming the surviving partner can go back to work after a death and earn additional income, but that's almost never the case.
 
So your wife and kids will be living mortgage-free.

Our attitudes to life cover were developed when women didn't go out to work even after their husband died.

These days most women would go out to work and earn a living and be fairly well off if they didn't have a mortgage to pay.
Click to expand...

There are times when I find it hard to believe I'm living in the 21st Century and not the 19th.... Why do you assume that only a man's life would be insured?
 
I'll tell you what Thirsty. We can take the thread off into a long diversion about political correctness. If the first aforementioned spouse is the only one of the couple to earn a living , outside the home, predeceases the second spouse, then he or she, being the first aforementioned spouse, should take out a level of cover which would cover the expenses of surviving spouse, until he or she, that is the surviving spouse...

You would be happy as any of your sensitivities would not harmed, but unfortunately, the answer would be unintelligible.

Of course,the OP could happily point out that we have made false assumptions and clarify the question a bit more.

Or we could have a new posting guideline forbidding anyone from answering a question until the questioner provides a full fact find including salaries of both spouses, ages of children, salary etc.

Brendan
 
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