3 Types of Insurance Young Families Should Consider
A simple guide for young parents looking to protect what is most important.
-
Ian Kennedy QFA
- September 5, 2022
As you start a family, it can be hectic, to say the least. Kid(s) arrive and it’s all systems go.
At this point, making financial plans for your future can fall down your to-do list. This is particularly true when it comes to planning for potential worst-case scenarios.
However, it’s crucial to make sure you protect your family and yourself.
This is where understanding the different types of insurance comes into play.
You probably hear different terms thrown around and understand you do need a certain level of protection.
Although, what you need will depend on your specific circumstances. Unfortunately, there is no one-size-fits-all solution.
That’s why we decided to write this guide.
We see the same concerns pop up constantly when talking with clients.
Below we break down and explain the three most important types of insurance for those with a young family.
However, if your kids are now slightly older and you feel you may have missed the boat, no need to panic.
You’ll still have options available. This guide will still assist you and we’ll still be on hand to answer any questions you may have.
Below we look at some real-life examples. After reading you should have a better understanding which cover, if any, may be appropriate for you.
What types of insurance do young families need?
If you have a young family you’d like to protect, there are three different types of cover you should consider.
We’re not suggesting you should have all three, but each is worth considering.
The three types of cover are:
For the purposes of this exercise, we’ll assume you have no other cover in place either personally or through your employer.
1 ) Income protection
Income Protection should be your first port of call. Without an income, everything else risks coming to a screeching halt.
An Income Protection policy pays you an agreed percentage of your salary should you be unable to work due to illness or injury.
Here’s an analogy we like. If you had a cash machine in your home that printed money each month, would you insure it? Well, you are that cash machine. So, it may be worth insuring yourself and your income.
Plus, there are several benefits of Income Protection. These include:
- Tax relief on premiums of up to 40%
- Long-term cover available
- Covers all illnesses and injuries
- Cover up to 75% of your salary
Fortunately, putting Income Protection in place will probably cost less than you think. Our surveys showed respondents overestimated the cost of Income Protection by 34%.
At this point, you’re likely thinking about how much does Income Protection cost. Let’s look at a real-life example.
First person: 38 year-old, male, non-smoker
Cover amount: €60,000 per annum (75% of an €80,0000 salary)
Retirement age: 65
Deferred period: 26 weeks
Class: 1 (IT Consultant)
Premium | Tax Relief (40% | Real Cost of Premium |
€76.45 | €30.58 | €45.87 |
The table above helps to illustrate how cost-effective Income Protection can be once tax relief is applied.
For just over €11 per week you would be insuring €60,000 of income per year. This would be paid directly to you on a monthly basis should you become unable to work due to illness or injury.
Of course there are variables. The cost of your premium will be affected by:
- Your age
- Occupation (class type)
- Health status
- Smoker status
- Deferred period
If you are in a low-risk occupation and have no Income Protection in place it may be time to reconsider.
2) Life Insurance
The second type of insurance you should consider is Life Insurance.
Life Insurance is designed to protect your family financially should you die unexpectedly. It will pay out a tax-free lump sum to your beneficiaries on your death.
There are a couple of universal thought processes with Life Insurance. Many people take cover out until their youngest child has finished education. Often this will be around age 23.
None of us enjoy thinking about it but we can all agree that life is unpredictable. Therefore, it is possible something could happen and your loved ones could have a different life than what you planned.
Having Life Insurance in place helps add some financial stability.
What is Life Insurance?
Life Insurance pays out a lump sum should you die during the agreed term in the policy.
You can have a single policy where one person is insured or a joint/dual policy where two people are insured under one policy.
You can calculate how much Life Insurance you may need by using our free Life Insurance Calculator.
Whichever the policy, Life Insurance is designed to provide you peace of mind that your family will be financially secure should the worst happen.
How does Life Insurance work?
A Life Insurance policy pays out provided you die during the timeline agreed in your policy.
How much Life Insurance you need will vary depending on your circumstance. Important aspects to discuss with your advisor include:
- How much cover may be required
- What length of policy is best suited
- Whether a single, joint or dual policy is most suitable
You should take into account each of these factors to make sure you have the appropriate level of coverage.
Benefits of Life Insurance
If the pandemic taught us anything, it’s that things can change very quickly. Having plans and safeguards in place is vital.
Life Insurance offers many benefits. Not only will it offer peace of mind, but the payout can also be used for a multitude of reasons.
1. Securing your family’s financial wellbeing
A major benefit of Life Insurance is that it may help replace a lost income. This may allow your loved ones to support themselves financially should something untoward happen.
2. Paying off loans or debts
The lump sum received from a Life Insurance policy may assist in paying off any outstanding loans or debts.
3. Inheritance
In some cases, the proceeds of a Life Insurance policy could be used as an inheritance. Any beneficiaries will be liable to the standard tax thresholds.
4. Covering funeral costs and expenses
Although it’s not something we like to think of, funerals are expensive. Alleviating this financial stress can be invaluable during an already stressful period.
3) Specified Serious Illness Cover
The third and final type of insurance to consider is Specified Serious Illness Cover.
Not to be confused with Income Protection. They are two very different products.
Income Protection pays out a regular payment until either you are fit to return to work or reach retirement age.
Specified Serious Illness Cover pays out a once-off lump sum on the diagnosis of an illness outlined in your policy.
The second part of that sentence is really important. You must be diagnosed with a specific illness contained in your policy conditions.
In some cases, it may require a certain severity of said illness.
Always read the small print!
Although slightly terrifying to read, Ireland has one of the highest cancer rates in the world. Almost 45,000 people are diagnosed in Ireland each year.
It’s for this reason policies such as Specified Serious Illness are popular. Should you get a dreaded diagnosis of cancer or something else outlined in your policy, you’ll be eligible for a tax-free lump sum.
As a parent, this is particularly important. You will likely need to take time off work. Down an income, things can get stressful very quickly.
Receiving a lump sum payment will allow you to focus on getting better and spending time with family.
4) Bonus Insurance (Private Health Insurance)
The fourth type of insurance worth considering is private health insurance.
It is not something we can put in place for you but we’d recommend it nonetheless. Particularly for those with young families.
If we create a scale of the most important types of insurance, Income Protection and Private Health Insurance would sit atop the pile.
They are two that should always be in place. Life Insurance would come in a close second place.
Where should I go from here?
Take stock of your situation. Do you have Income Protection through an employer? If not, does your partner/spouse?
What is the minimum you could live off each month? 75% of salary is the maximum amount you can cover but perhaps a lower percentage will suffice.
Start by calculating your mortgage and under essential outgoings. This will allow you to calculate a figure that works for you.
From here you can prioritise what is most important.
You are welcome to contact myself or our team with any questions you may have. This way you can decide what type of insurance is most beneficial to you and your family.
We’ll assist and ensure you get the correct cover in place. No more and no less.
Thanks for reading!
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