My partner and I are in our mid thirties and expecting our first baby. So we’re thinking about life assurance for the first time.  My partner has some cover through work.  I’m self-employed through a personal service company as a business analyst. How much life assurance do I need?

– JO’C, Co Kildare

Putting life assurance in place is easy to put on the long finger. But when people around you depend on you financially, you need to act. So what is it, and how much life assurance do you need?

What’s life assurance?

Life assurance is a financial product which pays tax-free money to a beneficiary (such as a spouse or your estate) in the event of your death. It typically involves you paying a monthly amount by direct debit to a life assurance company in exchange for a lump sum in the event of your death.

Life insurance is lowest-cost to buy when you are young and in good health. By putting a policy in place at this stage you can guarantee the monthly cost up until the policy expires.

You can read all about it in our FAQ.

How much do life assurance do you need?

Rules of thumb based on multiples of income abound.  They’re a useful starting point, but don’t tell you what your family would actually need if the worst happened. A more helpful approach is to think about the potential financial problems your life assurance is designed to solve.

For most young families, the first priority is the mortgage. In Ireland, that one is usually simple, because mortgage protection is a legal requirement. If you’re a homeowner, it’s likely you already have enough cover to ensure that, if one of you died, the mortgage would be repaid in full.

The next consideration is replacing lost income. Even if the mortgage disappears, everyday life continues. Life assurance provides a lump sum that allows the surviving partner to maintain the family’s standard of living.

Again, in Ireland there is a reduced need for cover here, compared to other countries. That’s because many people in this situation would receive the Bereaved partner’s (Contributory) pension (aka the widow’s pension) – currently worth €13,494 annually for those under 66.

Your employment situation also matters. As you are self-employed, you will likely need more cover.

Employees often receive some life cover through their employer, commonly known as a death-in-service benefit. This can be an excellent benefit, but it isn’t usually sufficient on its own. Many schemes provide between two and four times annual salary. That may sound generous until you consider the long-term financial needs of a young family with decades of expenses still ahead.

What’s more, if you change job you lose the benefit. The best way to think about life cover through work is as a top-up to the life assurance cover you hold directly.

How long should my life cover last?

The length of your cover is particularly important when young children are involved. Kids are expensive, and the financial impact of losing a parent extends well beyond the immediate loss of earnings. The surviving parent may need to reduce their working hours, pay for additional childcare, or simply have the flexibility to spend more time with their family.

In general, most people aim for cover to last until their children are well into adulthood – say age 25.

So how much cover should you buy?

The answer varies enormously, but it is not unusual for couples in their mid thirties with house repayments and young children to have between €500,000 and €1.5 million of life assurance each, including cover for a mortgage. Later in life, less cover is required, as the mortgage falls, children grow up, and other assets like pensions and investments rise.

The cost of cover in your thirties is often lower than many people expect, particularly if you’re in good health.  A non-smoking 35-year-old in Ireland in good health can obtain €1 million of life assurance for 25 years, for less than €60 per month.

For someone on a €75,000 salary with a mortgage of €400,000 and young children, this level of life assurance (on top of mortgage protection) is usually realistic.

Protecting your income

It’s also worth remembering that life assurance is only one part of protecting your family’s finances. While life assurance pays a lump sum if you die, income protection replaces part of your earnings if illness or injury prevents you from working.

Statistically, people are more likely to experience a prolonged period of illness during their working lives than to die before retirement, making income protection an important consideration alongside life assurance.  It’s particularly important for self-employed people, where being off sick often means no sales – and no income.

As you plan for your first child, reviewing life assurance and wider protection needs is one of the most valuable planning exercises you can undertake.

Next steps

Think you need life assurance and income protection? Tell us your needs here and we can advise you.