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Money Times - June 16, 2015

Posted by Jill Kerby on June 16 2015 @ 09:00

RESPONSIBLE PARENTING VS OVER-INDULGING

 

Parenthood is a tough gig. And modern parents have made it even more difficult for themselves with their aspirations for perfect children - hence our obsession with their 24/7 safety, well-being, health, education achievements - even after they’ve left their childhood and adolescence.

Yet new pieces of child-related research by two Irish insurance companies show how muddled our thinking on this really is:  the first, by Irish Life revealed that up to 500,000 parents of children under age 17 have absolutely no life insurance.

The other, by Aviva Home Insurance found that more than one in four (26%) of Irish 25 to 44 year olds are moving back to live with their parents in order to save money for a deposit on a house.  Presumably, as they save for the 20% deposit that most new home buyers of properties worth over €220,000 now require, many are consuming their parents’ incomes/savings – in the form of free electricity, heat, broadband, food, and perhaps, even their transport (aka the parental car or second car) because the ‘child’ doesn’t have their own car, (on account of them saving for the deposit).

The Irish Life study is especially ironic. It states that about 500,000 parents (45% of total numbers) admitted to having no life insurance whatsoever when questioned about their finances. While there will certainly be many among that number who can genuinely plead an inability to pay, how can all the others in this age of child-centrism, not protect their offspring’s financial security in the event of their own untimely deaths?

Meanwhile, of those who do have life insurance, 25% admitted they didn’t know how much they have. Just 5% have cover above €300,00 and the average policy is worth just €152,040. For anyone with an average income of €36,003, this represents just a little over four years’ salary.

So how did those surveyed feel generally about their lack of financial preparedness? Just 16% said they “felt confident”, but they were mostly in the ‘early retired’ category, and/or in their late 50s. Less than a third (29%) of respondents said they “feel OK” about their level of financial planning, while 55% of respondents said they were “worried”. Of this latter group, 83% had no financial plan in place.

Which leads us back to the second study, conducted by Aviva Home Insurance and the home returnees.

 

My experience of speaking to Irish parents about their co-habiting adult children is that only a minority of parents charge their children a marketable rent if their offspring has income.  Few if any expect their children to purchase their own food, cook for themselves. Even fewer hand them the utility bills and expect them to pay a third (or quarter if two are still living at home).

However expensive rents have become, however difficult it is to put together a €40,000 down payment for a €200,000 mortgage, few parents, in my experience, impose very many terms and conditions on their adult children’s return residency, which might include sacrificing their own car in favour of public transport or a bike or foregoing foreign holidays, two of the biggest discretionary spends for young people.

By the time your children reach adulthood, you hardly need much life insurance. Theoretically, your job as their protector is done and they should be financially independent. By your late 40s or 50s the cost of a new life insurance policy is much too expensive anyway; any remaining should be aimed at providing for a dependent spouse, at least until retirement.

Which returns us to the Irish Life study.  It is when your children are at their most vulnerable – up to age 18, (or if they are still in third level education) that you want to make sure, as parents, that they will be financially protected via the life insurance on your lives. (Just €24 a month can buy c€200,000 worth of joint cover for non-smoking 30 year olds.)

If your offspring are still dependent on you in their mid 20s or 30s, it’s a financial adviser, not an insurance broker that you need, since the income or savings still being consumed by them could very well scuttle your own financial independence in retirement. (Other surveys consistently show that people in their 40s and 50s have underfunded their pensions. The average defined contribution pension fund in retirement is worth only about €100,000 or an annuitized annual income for life of only about €3,500.)

So two conclusions can be gleaned from these surveys:  you buy lots of cheap life insurance when you and your children are young…and once they reach adulthood, get a job and move out, the money you have been spending on them for their food, clothes, education, hobbies, holidays gets diverted into the retirement fund that you will be relying on for the last 20 years of your non-working life.

Anything else could be construed as …over-indulgent?

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.   

 

 

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