Family and finance: Our financial experts on how to avoid a cash crisis and safe-proof your income
Worrying over money and finance is something a lot of us do, causing stress, tension and often, unfortunately, arguments.
But the thing is – a little bit of financial planning can go a long way when it comes to getting control over your money and helping you save, budget and manage your finances better.
We are continuing our series on personal finance with money expert Paul Merriman of askpaul.ie, and this week, Merriman looks at every family’s most important asset — their income, and how you can best safeproof your financial future to help reduce the stress and worry in the worst case scenario.
According to Merriman, there are two main ways of doing that are income protection and life assurance.
You might not be aware that an employee has no right under Irish employment law to be paid while on sick leave.
It is at the discretion of the employer to decide their own policy on sick leave.
If you have enough social insurance contributions (if an employee) you can apply for Illness Benefit of €198.50 per week. This equates to €10,322 per annum —a massive drop in income for anyone earning the average full-time wage in Ireland of €47,595 per annum.
Unfortunately if you are self-employed you do not qualify for Illness Benefit, you may however qualify for the invalidity pension which is the same amount as the Illness Benefit BUT is much harder to qualify for.
An example of this would be the timing around claiming invalidity pensions; you must have been incapable for work for at least 12 months and be likely to be incapable of work for at least another 12 months, whereas for illness benefit it kicks in as soon as you are certified by your doctor to be unable to work due to an accident or sickness.
This is why income protection is a crucial insurance policy for every family, but especially those that have a self-employed income coming in.
The typical household relies on one, or both, parents bringing in a wage to cover essentials such as groceries, mortgage/rent, utility bills, car/travel costs and so on.
“Without an income, all this expenditure grinds to a halt and the last thing a family needs during a health crisis is a financial crisis”, explains Merriman. "Think about what would happen to your family if you or your partner had a serious illness or accident, for example."
Income protection will pay you up to 75 percent of your annual income for a specified period of time once you have been out of work for four weeks or longer.
The cost of income protection will depend on whether you have a low-risk job (such as an office worker) or higher risk job (such as a manual labourer).
One of the bonuses of taking out an income protection policy is that you can claim tax relief on your premiums at your marginal rate of tax making the premium more affordable.
Your local financial broker can explain all your options in greater detail — you can find one at trustedadvisor.ie
Life assurance, according to Merriman, is something that a lot of people really don’t want to think about, and warns that one of the most mis-sold products at the moment is mortgage protection packaged as life cover.
“We often come across people who think they have life assurance, when really all that they have is mortgage protection,” the money expert explains. “In the event of something happening, this only protects the mortgage lender! It doesn’t protect families to any great extent at all.”
Traditionally, a life assurance premium would have been ‘invested’ by the life companies, and they would also periodically ‘review’ your cover. This could result in higher premiums, at the discretion of the insurers.
Today, the life assurance business has been modernised to become more consumer focused. It is available at a guaranteed rate, for a guaranteed premium, over a guaranteed term.
Essentially, you’re looking to insure yourself (in the event of your death) during the years when you will need it the most, ie when you and your partner have financial dependants and commitments.
Life assurance can now be adapted to your circumstances as they change, every ten or twenty years.
And remember, life cover is very important for homemakers as well as wage earners. A 2016 survey by Royal London estimated that paying someone to do all the work of a stay-at-home-parent, including childcare and household chores, would require on outlay of around €42,000 a year.
Life assurance is the most affordable financial product in the market place today. A couple both aged 35 can get a very good family life cover plan for as little as €30.05 per month (based on a term of 20 years and both being non-smokers).
Finding the money
You might be reading this and thinking that income protection and life assurance sound like great ideas but you can’t afford them because your family budget is busted with day to day living expenses.
"This is why it’s vital to sit down and compile a detailed list of every single outgoing you have," advises Merriman. "Most of us fritter away thousands of euro every year on silly purchases, without even realising it. Stop paying money for stupid things like bottled water and coffee. Spending €5 every day on unnecessary items adds up to a massive €1,825 per year."
Similarily, the expert reminds us, giving up smoking could save you several thousand of euro a year — and reduce your life insurance premium.
Insurance is one of those things that can seem a burden, rather than a benefit. But ask anyone that has ever had a serious claim on an insurance policy, whether health, car or income, and they’re glad it was there when they needed it.
The trick to getting a good insurance deal is shopping around. And if you’re too busy, use a multi-agency broker and they can research the market on a ‘fair analysis’ basis.
For more tips and information, check out www.askpaul.ie/financial-planning/ and get a free personal budget template and advice in easy to follow steps so you can create your own personal financial plan.