3 Reasons for buying Life Assurance

Life Assurance is a topic that no one wants to talk about but is something that almost everyone has to pay for at some time in your life. Below are 3 of the main reasons for buying life assurance and the types of life assurance you will need.

3 Reasons for buying Life Assurance

  1. Buying your own home – Mortgage Protection.
  2. Starting a family – Life Assurance.
  3. Becoming self-employed – Income Protection.

 

Buying your own home – Mortgage Protection

When you buy your own home most people will go to the bank for a mortgage in order to afford the home – one of the banks conditions of getting a mortgage will be that you have taken out an adequate mortgage protection policy.

Mortgage protection is a life assurance policy that will pay off the mortgage outstanding on your home if you die before you have paid off the mortgage. So if you die with €100k left on your mortgage – the policy will pay the €100k directly to the bank.

When getting a mortgage the bank will try to sell you mortgage protection however there is nothing stopping you from buying mortgage protection from a different provider – often this is the cheaper and better option as banks in Ireland don’t compare the market for you only offer products from a single provider such as Irish Life. Independent financial advisors are able to compare market for you for cheaper more flexible policies than offered by your bank.

Starting a family– Life Assurance

Having your first child is often the main reason why people start considering taking out life assurance policies – so that their family is looked after if anything should happen to the parents.

Life assurance provides a lump sum for your dependents if you die which can be used for many reasons such to provide an income for when you’re gone or to pay for college fees etc.

The cost of life assurance will depend on the type of policy you choose, the amount you choose and the term of the policy. Other factors that will affect the cost will be your age, health & personal circumstances.

 

Becoming self-employed – Income Protection

Becoming self-employed is a big step and you need to consider what will happen if you are unable to work.  In Ireland the self-employed are not entitled to anything if they cannot work due to health reasons unlike PAYE workers who are entitled to social welfare disability benefits.

Income protection will pay you up to 75% of your income if you can’t work due to illness or disability. It will start paying out once you have been out of work for a certain amount of time – the amount of time will depend on the policy you take out.

Tax relief is also available on the cost of income protection policies at the highest rate of tax you pay so this will lower the cost.

Time Value of Money – Explained

One area that a lot of people struggle with is understanding the time value of money – often when someone mentions this concept a lot of people take it as a signal to stop paying attention.

There are 4 concepts that you need to get your head around to understand the time value of money

  • Compounding
  • Discounting
  • Present Value
  • Future Value

Compounding

Compound interest is when your interest also earns interest. So if you have savings earning 10% in the first year you will receive €10 Interest and then in the second year you will receive €11 in interest (110*10%)

Discounting

Is the opposite of compounding. It is calculating the value you need to have on deposit today to get €110 in the future.

Present Value

Present value is the value today of an amount in the future.

What would you prefer – to receive €100 today or receive €100 in a years time?

Automatically the answer is €100 today as you could put that €100 in a deposit account at 4% and it will be worth €104 in a years time, instead of €100.

Or to put it another way what would you prefer – to pay €100 in a years time or pay it today?

Again the answer is automatically a years time. As you could put €96 into a savings account today and it will be worth €100 in a years time.

So getting €100 next year is only worth €96 today. This is called the present value.

Future Value

The future value is what your money will be worth in a years time compounded at the interest rate it is earning.

The future value of €100 compounded by 4% over a year is €104.

 

Use in the Real world

The time value of money is one of the building blocks of finance and it can get more complicated when you take into account inflation, cashflows at different times and different rates of return over the course of an investment – however, if you can get your head around the above example you will have a greater understanding of finance than most.

By understanding the time value and how to discount and compound money can make a huge difference to your financial health over the course of your life, as it can be used to calculate return on investments and in all aspects of personal finance.