How to build a Robust Financial Protection Portfolio

Financial protection should be the cornerstone of your financial planning. The maxim 'what we have hold' may be applied to financial protection. For example, the main purpose of life insurance is to protect income lost as a result of death. On this page we have set out information about financial protection. We have included Frequently Asked Questions as resource. This list is not exhaustive and we welcome new questions and queries. 

  • Am I paying too much for my mortgage protection?
  • I have health issues. 
  • What is Serious illness Cover and is it any good? 
  • How much does life insurance cost? 
  • How can I protect my income against accident and illness? 
  • Am I already covered at work and if so then what will happen to my cover when I leave?
  • How do I make a claim? 
  • Should I put my Life Insurance in trust?

Advice for young families buying term Life Insurance

Financial protection should be the cornerstone of your financial planning.

The maxim 'what we have hold' may be applied to financial protection. For example, the main purpose of life insurance is to protect income lost as a result of death. An effective life insurance policy will replace the income lost. This may be achieved by reinvesting or banking the life insurance benefits to produce an annual income equivalent to that lost. There are many formulas applied as ready reckoners to estimate the amount of life insurance cover required to replace lost income. We recommend the following one.

Take the gross amount of annual income and subtract the amount of Social Welfare benefit payable annually to the surviving partner or spouse. Next, multiply this amount by the number of years remaining until the youngest child reaches the age of 25.

This age is subjective. We use it based on the assumption that the child at age 25 will have completed their education and/or may be in full-time employment or at least on the way to being financially independent. 

Of course, no two sets of family circumstances are exactly the same as factors such as physical and mental health play a role alongside changes to the family structure.

Once the term of years has been estimated multiply the net figure arrived at earlier to calculate the amount of cover required. If any existing life insurance is in place (personal cover or occupational cover such as death-in-service insurance) then subtract these amounts to arrive at a net figure.

Finally add in any outstanding loan amounts and this is the amount of cover required using this formula. As pointed out earlier these formulas are subjective and the outputs obviously depend entirely on the information input, but as a tool for estimating the amount of life insurance required by young families it has pretty much stood the test of time. 

Use an online calculator but think in ink

It is of course possible to use an online calculator. These are readily available on many insurance companies' websites and most brokers have a link to a life insurance calculator. These calculators are at the core of many online comparison sites and direct insurers' business models.

Whilst it's tempting to simply fill in a few questions to arrive at a figure we believe that these calculators should be used only as a tool. As stated earlier no two families will have exactly the same circumstances. 

Buying life insurance is something most people will do perhaps a handful of times during their lives. By all means, use an online calculator but then 'think in ink' about your own situation and about what exactly it is you need to protect. Perhaps you may be expecting an inheritance, pau]ying down debts, expecting a child, or starting a business. Write down anything that may lead to a change in circumstances over the term of the policy and factor these into your calculations.

It's better to be looking at it than for it

It's really not possible to have too much life insurance so buy as much cover as you can afford as soon as you can. There's an old saying that you pay for life insurance with money but you buy it with your health. Younger healthier people can purchase large amounts of life insurance at surprisingly cheap rates.

The next tip is to extend the term for as long as possible as the premium set at the beginning of the term will remain the same for the full term of the policy.

Inflation proof your life insurance

Choose an indexation option at the outset and this will allow you to increase the amount of life insurance annually to protect the buying power of the benefits. Note: It is not possible to add indexation once the policy is in force. Some companies charge an additional premium to include an indexation option so be careful. Typically, your premium will increase by 3 -4% and the amount of cover will increase by around roughly the same amount. Again some companies increase the premium by higher amounts so read the small print to avoid getting a shock in future years.

Here comes the ad - or talk to a Broker.

Give yourself some wriggle room - add a conversion option

Adding an option to convert your policy to another policy at some time in the future without additional medical evidence makes sense. The additional premium adds only a few cents to the premium. If your health declines during the initial term then a conversion option means you can still get cove by extending the original policy by using the conversion option.

However, do bear in mind that the new premium is likely to be far higher than the original as the rate will be based on your current age and not on your age at the outset. Additionally, if you were a smoker at the outset then it is likely that you will still be charged smokers rates even if you have quit.

how to avoid setting up a Policy incorrectly - get advice!

Your policy may be set up on a single dual or joint life basis. It may be written in trust and it may be assigned to a third party. Pension Term Assurance is tax-deductible and this may be a consideration for eligible individuals. Don't forget to include new policies in your will even if they are written in trust.

This part of the process is vitally important to get right as the sole purpose of insurance is to put money into the right hands at the right time to deal with financial problems. Take some time to read the definitions set out below. If you're still not sure then take some advice. We have seen many cases where issues have arisen at the claims stage because policies were incorrectly set up. Of course it's possible to do it yourself but ideally you should take some advice. Most good financial advisors will provide this advice free of charge. Ideally you should discuss this as part of a financial review and needs analysis.

Nothing is written in stone

Congratulations, now you have a robust, well constructed, and cost-efficient life insurance policy. Job done?

Not quite. Nothing is written in stone as the years gallop by change is inevitable. Review your policies every now and again to ensure they remain fit-for-purpose. Typically, your financial advisor will keep in touch and update the policies to reflect any changes in your personal or professional circumstances. If you don't use a financial advisor then revisit the reasons you bought the cover in the first place and make any changes you deem necessary.

Useful tools and resources

Should I choose Dual or Joint Life Insurance?

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