How Does Financial Protection Change for Different Life Stages?

While financial protection products are not particularly complicated, the range of options available can sometimes be a little daunting. 

How can you decide which type of cover you need, how much to insure for, and which optional extras to include?

Your protection needs will depend on several factors, such as:

• Your family situation
• Your debts and other commitments
• Your budget

While every situation is different, most people find that their requirements evolve over time. A young professional with no dependents has very different needs from a retired person who wants to pass on wealth to their family.

Starting Out
When you are starting out in your career, you probably don’t have too many responsibilities. Most young professionals rent their homes, so they don’t have a mortgage to worry about. 

They probably don’t have anyone depending on them financially. The average age for buying a property in Ireland is 36¹, and the average age for having a first child is 33.3 for mothers and 33.7² for fathers. 

This doesn’t mean that people in their twenties don’t need financial protection. There are still bills to pay and a retirement to save for.

The main financial risk for a young professional is the possibility of becoming ill and unable to work. Fortunately, there are ways of addressing this risk.

Income Protection
Income protection provides a monthly income if you can’t work for health reasons. A wide range of options is available, for example:

• Cover amount—You can choose your cover level, but it will be capped, usually at 50% to 75% of your gross salary.
• Deferred period—You can opt for a deferred period ranging from one month to one year. Shorter deferred periods make the plan more expensive. The optimal deferred period will depend on how long your employer would pay you if you were ill and how much you have in savings to cover any short unpaid periods of illness.
• Term—You can choose the plan's expiry date, which normally coincides with your planned retirement age.
• Payment period—A full–term plan pays a benefit either until you recover or until the plan expires. Shorter payment terms (usually from 1 to 5 years) are also available and are often cheaper.
• Indexation – you can choose for your cover (and premium) to increase with inflation.
• Age rating: You can select a plan that increases the premium every year with your age. This is normally cheaper at the outset but more expensive over the long term.
• Your plan may offer “increase options” so that you can update your cover amount if your salary increases in the future.

As income protection can be one of the more expensive insurances, it is worth setting this up as early as possible. Premiums will only rise as you get older, particularly if you develop any health issues.

While a full-term, indexed plan with maximum cover and guaranteed premiums provides the most comprehensive protection, budget should also be taken into account. A lower level of cover is better than no cover at all.

Protecting Your Mortgage
When you buy your first property, you will need to ensure that the mortgage can still be covered even if something happens to you. 

Life Cover
A life insurance plan will pay out a lump sum in the event of your death. 
Most mortgage protection plans decrease every year, on the assumption that the mortgage will also reduce.

Critical Illness
A critical illness plan will pay out a lump sum if you are diagnosed with a serious illness. The condition must be specifically covered by the policy.

Critical illness can be bought on its own, but it can be better value to include life cover as well.

Remember that most life with critical illness plans will pay out on the first event only. If you receive a lump sum in respect of a critical illness, no additional benefits can be paid if you subsequently die.

Time to Review
As your outgoings increase, it may also be worth checking that your income protection plan provides enough cover and that it offers the best value.

Supporting Your Family
If you have a family to take care of, it is unlikely that protecting your mortgage alone will be enough. You should also consider:
Lost earnings

• Childcare and educational costs
• Additional help at home
• The possibility that your partner may not be able to work, or that their health may decline later in life.

Time to Review
When you have a family, it’s often a good idea to substantially increase your life cover to ensure that your family will be financially comfortable if anything happens to you. It may also be worth reviewing your critical illness cover.

You should also consider placing your life cover in trust. This will ensure that any payout will be outside your estate and can be distributed to your beneficiaries more quickly. 

Leaving a Legacy
As your mortgage is cleared and your children become more independent, financial protection may become less of a priority. But financial protection could still benefit you if:

• You would like to ring-fence an inheritance for your family, and are concerned that your own capital will be eroded by care costs. A whole of life plan placed in trust could serve this purpose. 
• You have a large Inheritance Tax liability and would like to make sure the money is available to pay it without reducing the value of your estate. Again, a whole of life plan (section 72 policy) could achieve this. 

Reviewing your protection needs 
There are essentially three life stages when you should consider reviewing your protection policies:

Stage 1 – Debt or birth of a child
If you have a mortgage, a business loan, or have started a family you will need to put in place mortgage protection, life cover, or income protection.

Stage 2 -  Mid-Career 
Protection policies can be initiated by a bank as a condition of a loan. These policies can be typically more expensive than they should be. If you are mid-career, and would like to lower your costs, you should take the opportunity to review your existing protection policies.

Stage 3 – Approaching Retirement 
The need for life cover decreases as you get older as children become independent and business loans are paid back. This is why reviewing your life cover as you approach retirement is a good idea. You may be paying for something that is no longer needed.

1. Central Bank of Ireland, 2024 

2. CSO