Question
In an effort to cut back and save more I am re-assessing all of my outgoings. I have been paying into a life policy for a number of years and I am considering cancelling it. Is this wise?

Answer

A life cover policy is designed to pay out a set amount of money if you die during the term of the policy. Before cancelling any life cover policy it is important to consider what the policy is for and why you took it out in the first place. If it is in connection with your mortgage your lender will have assignment over it and you will not be able to cancel it without their permission, which is unlikely if your mortgage has a sizable balance outstanding. In any event it would not be advisable to cancel mortgage protection as it is designed to pay off your mortgage on the event of your death.

No matter how much you earn it is important to make sure that your dependants have enough money to live on and pay off your debts were you to die. You need to consider your own particular circumstances and the financial impact which your premature death would have on those who rely on you financially. Generally, the need for life insurance is greater if you have large debts, such as a mortgage, and/or a young family. If are single with no dependants or debt your need for life cover is likely to be much less.

As a general rule of thumb those with a younger family need to have more life cover than those whose children are older simply because the lump sum will have to last longer, until your youngest child is no longer financially dependant on you. In a family situation the loss of a spouse or partner may mean you having to stop work, or reduce hours worked, and/or pay for additional child care. Therefore both partners should be covered.

The same logic applies to the term or length of cover that you need. The most cost effective form of life cover will have a set term or duration e.g. 10 years, 15 years, 20 years etc as opposed to whole of life cover which runs indefinitely. Ideally the minimum term should take your youngest child to an age when he/she becomes financially independent.

As mentioned there are a number of different types of life cover and some are more expensive than others. You need to make sure that the policy that you have is appropriate for your own needs and that you are getting value for money. Life cover is not like other forms of insurance, such as motor or household insurance, where you can easily switch when your policy is due for renewal. Life cover is a long term policy, so it is essential to make sure that your policy gives you the security you need and long term value for money.

It is also important to note that if you cancel your life cover and later re-apply for cover, you will be subject to the underwriting process again on the new application. This means that if you have had any medical issues you may find it difficult and/or more expensive to get new cover. New cover is also likely to be more expensive simply because you are older and are therefore a higher risk.

Before making any final decision on cancelling your policy we recommend that you look at your existing cover, decide what cover you actually need, and shop around to make sure that you are getting good value for money.

We would always recommend that you seek independent professional advice before taking out or cancelling any life cover policies.

For further information on any of the above contact:
CML Financial, Independent Financial Advisors, The Business Centre, Lisfannon, Buncrana, Co. Donegal, T: +353 (0)74 9364255 F: +353 (0)74 9361955
CML Financial Limited t/a CML Financial is regulated by the Financial Regulator

Joanne Enright MSc QFA MSI
Email: joanne@cmlfinancial.ie