Life Is life insurance "worth" it.

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meadow

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I have a general query on life insurance. I know that it is quite subjective and may be difficult to answer but would appreciate any opinions or feedback.

We are a healthy couple in early forties with two young children, We don't smoke, are reasonably fit and lead a reasonably healthy lifestyle.

We are in the fortunate position of having our mortgage paid off and are lucky to have significant life savings .

My job will most likely be at risk in the next few months but my partners job is relatively secure, and we could probably live on a single wage if we cut back on costs.

We recently looked into purchasing life assurance.

We were recommended by a financial advisor to get dual policy indexed life assurance for 300k each over 20 years.

This works out at approx €98 per month,

Indexation means the amount payable increases at a 5% pa but the premium increases at 8% pa . I don't understand the reason for the percentage difference in increase (and neither did the financial advisor from a well known financial advice company )

This would mean that if neither of us die over the next 20 years we would end up paying around €87,000 in insurance premiums. Which we will never see again.

Now I fully understand that is the nature of insurance, you pay for risk mitigation.

But this appears to me to be a large amount of money to be paying, And am wondering if this is another example of financial companies playing on peoples fears to boost profits.

There is very selective quotation of statistics in their brochures to back up their claims why you would need life insurance.

I suppose , I am wondering what is the statistical chance of either or both of us dying in the next 20 years and if that is worth an investment of 87,000.

I know that this is a subjective matter and depends on factors such as risk aversion and that statistics don't matter if it turns out to be you !

But I would be interested to hear peoples thoughts.

Do many people purchase life insurance separate to the mortgage ( a lot of the queries here seem to be related to mortgages which doesn't apply in our case)

Thanks
 
I'll try to answer a number of your points.

First of all, I dont like indexed policies that vary the difference in premium increase and benefit increase. If you feel inflation is an issue, its cheaper to put a bit more cover on at the policy commencement.

The reasons people generally take out life assurance other than for mortgage purposes are;

- to provide for childrens education, you mention that you have 2 young children so getting cover at least until the youngest one is 21 could be something to consider.
- to provide money for funeral expenses, obviously this wouldnt be at the level you were thinking of getting cover for, approx €10,000 is normally what I find people looking for cover to suit this purpose.
- to provide a lump sum to an adult dependent, this could be someone disabled etc that relies on being provided for by the insured.
- to provide a lump sum for the spouse who doesnt work (maybe a primary carer of children, may just want a to live a life of leisure and not return to work if their spouse dies).

Based on what you have said in regard to your employment status, really its your partners income that you would want to protect against if anything happened to them as its the more secure income and as you say you could survive on that income. A single life policy on your partner may be worth considering in this case and it would reduce the cost.

In regard to claims, statistics wont really mean much. You are purchasing peace of mind, not purchasing to make a profit. Anyone can get ill or knocked down by a bus. If you live past the term of the policy, you should be happy that you lived that long, not sad cause you didnt die to make a policy worthwhile.

Based on the information you have provided, an alternative protection strategy would be just to take cover out on your partner on a level term basis and consider the term, do you need cover to retirement or just until your children are old enough to look after themselves.




www.CheaperLifeAssurance.ie
 
Many thanks for your comments StevieC.

It is interesting that you would generally not favor indexed policies that have a greater annual percentage increase in premium payable and benefit payable.

Inflation was not really a major factor for me (certainly not at a continuous year on year rate of a fixed 5%)

But the financial advisor we spoke to absolutely recommended this and said that she strongly advised all her clients to take this option.

The annual 8% increase seemed excessive in my view and I like your suggestion of just putting more cover on at the policy commencement.

Thanks for your other comments as well. I take the point about not being sad that I mightn't get to cash in on the policy but I don't want to spend too much on premiums either.

Based on what you have said I think we may have been over insuring ourselves. We currently have savings that could cover our children's education. We could also cover funeral costs.
We plan to lock these away in a long term fund so and not touch them so that they will always be available.

We will have a think about the figures again,

Many thanks for your thoughts,
 
meadow said:
I suppose , I am wondering what is the statistical chance of either or both of us dying in the next 20 years and if that is worth an investment of 87,000.
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It is if either of you died in the 20 years. Stastically there is less of chance of you dying this year than in 10 or 15 years and that is why premiums are based on one's age at the time of taking out the policy.

The policy is indexed at 8% rather than 5% because each year the sum insured is going up by 5% but you are a year older buying the extra 5%.

Not all companies index by 8% but their price tends to be more expensive initially.
 
Over the course of these policies though typically you will pay more in total premiums with 8% premium indexation that a policy with 5% indexation (with a higher starting premium) or even adding on a bit more cover at the outset and doing it on a level basis.

Just because there is a logical reason for bigger increases does not make them value for money.
 
Johnweber said:
The policy is indexed at 8% rather than 5% because each year the sum insured is going up by 5% but you are a year older buying the extra 5%.
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If I chose a level term policy (ie not indexed), does the premium increase by 3% each year to account for the fact that I have a greater chance of dying each year as I get older ?

My understanding was the premium stayed the same

If this is the case, I don't understand why there is an extra 3% loaded onto the indexed linked policy.
 
StevieC said:
In regard to claims, statistics wont really mean much. You are purchasing peace of mind, not purchasing to make a profit. Anyone can get ill or knocked down by a bus.
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I had another think about this,

Surely statistics can be very meaningful here as you are buying insurance to mitigate against the risks of a certain event happening within a certain time frame.

If I was told that statistically, someone with my lifestyle and family history had a 10% chance of dying in the next 20 years then of course I would probably pay the premium for the peace of mind without even thinking about it.

If I was told that statistically, someone with my lifestyle and family history had a .01% chance of dying in the next 20 years, then perhaps I would reconsider or at least only pay for a reduced benefit and invest the money saved in something else that could be passed on to my family when I do eventually die.

Of course, as you say anyone can be hit by a bus but statistics can also help give peace of mind and help you evaluate your decision when making a potentially huge outlay (87k),

Statistics are selectively quoted by insurance companies to unsettle you.

For instance , in the brochure I received there was some quote like , "did you know, we paid out x number of policies to families of men under 50 last year"

But this is meaningless without knowing the total number of policies for men under 50, lifestyles of the persons involved, family history etc.

And IMHO is purely there to introduce some doubt and fear to the reader.

The insurance companies have teams of actuaries who study these statistics and figures but I am wondering are they published anywhere.
 
 
I think you answered your own question here. Any statistics on claims wont give you a breakdown on your exact set of circumstances as everyone will have different mitigating factors.

For example; X amount of people die of cancer, but some people get screened regularly increasing the chance of full recovery and some dont. X amount of people die of heart attacks but some people dont get their blood pressure/cholesterol checked so are unaware that contributory factors are mounting until its too late.
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You have to fill out a detailed medical questionnaire when applying for insurance. I assume the insurance companies will then assign you a risk factor depending on the results. They employ a lot of expensive actuaries to work this out so I assume there must be some level of general accuracy to it (accepting of course on an individual level there can be significant deviations)

If I put on my cynical hat for a moment.

I just have this niggling feeling that my risk factor could be quite low but the insurance companies see me as an opportunity to make a significant profit over the course of 20 years. And quote uneasy statistics to encourage me to sign up. Charging a premium which is disproportionate to my risk factor.

As I said in the opening post, I have no problem with the concept of insurance, and pay car, home, and health insurance.

But the cost of these premiums seem to proportionately reflect the risk involved while the life insurance premium doesn't.

Of course, I have no rational explanation for why I think this given that I have no idea what the risk factors in the other 3 types of insurance are.

Perhaps, It is as you say StevieC that I am over insured, or the feeling that it is something that will happen to someone else and not me.

But thank you again for taking the time to read my post and respond.

BTW am I correct in my assumption that level term premiums do not increase over the length of the term ? Ie you pay the same amount in year 1 as you do in year 20 ?
 
Thats correct, level term policy premium stay the same on a fixed term policy. Some whole of life policies have premium reviews but if I were you I would avoid these types of policy.

The only way a fixed term level policy premium will increase if the government put a levy on it (like the 1% levy they imposed last year).

The medical questions on the application form are used for underwriting purposes rather than statistical purposes. If someone has a previous medical history then they could be premium loaded to reflect greater risk or even declined (this is most often dictated by their reassurance companies guidelines). Typically actuarial departments will not break down claims based on the actual answers on proposal forms of claimants. They work their math brains on the overall book of business comparing claims to premiums, work in profit margins to cover their costs and charge the lowest premium they can to outdo their competitors.
 

Thank you for that explanation. I suppose that makes more sense.

Seems I was being too cynical !

I will play with some figures on your site to get an idea of level of insurance I am comfortable with, and may be in touch.
 
OT, but does anyone know the difference between Assurance and Insurance? I remember getting that question in my leaving cert many years ago. LOLS.
 
Insurance was the word traditionally used for general insurance. Assurance was used for life assurance. They both mean the same thing and the difference has more or less been lost over the years.
 
UptheDeise said:
OT, but does anyone know the difference between Assurance and Insurance? I remember getting that question in my leaving cert many years ago. LOLS.
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Strictly speaking, insurance is for an event that might happen ( theft, accident) and assurance is for an event which will definitely happen ( death).

So, assurance is only applicable for whole of life policies.

In reality, they are both used to mean the same thing, and insurance is the genrally recognised term.
 
"If I was told that statistically, someone with my lifestyle and family history had a 10% chance of dying in the next 20 years then of course I would probably pay the premium for the peace of mind without even thinking about it."


According to Irish Life Table No 15 (http://www.cso.ie/releasespublications/documents/births_d_m/current/irishlife.pdf)probablity the probability of a male age 45 surviving from age 45 to 65 is (l65/l45 = 84856/96116= 88.3% or 11.7% probablity of dying during this period. Probablity of a for a female aged 45 surving to 65 = 90532/97962 = 92.4%. Probability of both male and female surviving to 65 = 92.4%*88.3%=81.6%. Probablility of at least one dying before age 65 = 18.4%.

Therefore statistically if you are both typical of the irish population then you have an 18.4% of collecting 300,000. If you are healthier than typical, then your chances are lower.
 

Thanks for the link dishwasher, I suppose this was the type of data I was interested in. A lot of information in that file.


Are you sure about this ? Is this not the probability of any male and any female dying before age 65. Ie not necessarily married to each other. So it is the probability of 2 independent events.

I imagine the probability of a male dying before 65 who is married to a woman who also dies before 65 must be lower than this as it is the probability of 2 dependent events.

Though I don't know how to calculate this
 
I could give you a formula for how to calculate this but don't want to appear too nerdy!!

However, you are right that the probability of BOTH a man AND his partner dying before 65 is a LOT smaller than the probability of only ONE of them dying before age 65.

However, what you've been quoted for is a dual life insurance policy that pays out if EITHER of you die during the period insured. This means if only one of you were to die during the 20 years the policy would pay out 300k but if you were both unlucky enough to die during the 20 years the policy would pay out 600k.

If you only want a policy that pays out 300k if you BOTH die during the 20 years this is called a "joint life last survivor" policy. This is not commonly sold but would be a LOT cheaper than what you've been quoted for. Typically "joint life last survivor" would be for inheritance tax planning and on a "whole of life" basis rather than a term assurance where you are covered only for a specific period.

There is an option that is usually a bit cheaper than dual life that is just called "joint life" short for "joint life first death". In this case it would pay 300k on FIRST death within 20 years and then nothing when / if the other person dies.
 
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