What is . . . ?

Life Assurance: This is cover designed to provide a financial lump sum to a family/person/company in the event of the death of a specified individual. There are different kinds of Life Assurance that include:

• Mortgage Protection – Decreasing Life Assurance – ends at set term

• Term Assurance – Level Life Assurance – ends at set term

• Whole of Life cover – Level Life Assurance – No set term

• There is reviewable and non reviewable Whole of Life cover

  Life Assurance with convertible option: You can request a conversion option on some Life cover. This allows you to extend the lifetime of your policy without having to supply any medical information. This allows some people to choose a shorter term for cover now, at a lower cost.

  An example of this benefit would be if you take out €100,000 Life cover for 10 years with a conversion option. During the 10 year lifetime of this plan you might get sick or be struck with an illness that would prevent you from taking out Life cover in the future. The conversion option would allow you to extend the term of your €100,000 Life cover beyond the 10 years and the Life company could only use your medical information from the original application.

  Serious Illness Cover: This is cover designed to provide a financial lump sum to a family/person/company where a specified individual is diagnosed with a Serious Illness.

  Income Protection: This is a cover designed to be a replacement Income if a person is unable to work due to illness or injury. It is particularly important for self-employed people.

  The cost of these covers depends mainly on your age, your smoker status, your health and the length of time you would like the cover.

  Pensions: During your working life, you can save into a Pension arrangement to subsidise your drop in income at retirement. The main advantages of this are that you get tax relief on your contributions and you get tax free growth on your investment.

  Savings/Investment plans: An alternative to saving/investing money in the bank. The main advantage is that there is a much greater potential to grow your investment. The main disadvantage is that your value can go down as well as up.

Stick or Twist

I would like to believe that my clients trust me, particularly the ones who use my services multiple times. But trust is not something easily earned. In my experience I have met with people whom are reluctant to change their existing policy even if it will actually save them money. At times I get the impression some people are dubious of a financial broker’s recommendation for one reason or another.

Lose Out Benefits

The main feedback/reasons I get for not proceeding with a recommendation are that people are concerned that they might lose out on benefits if they change. “What will happen if I die one week after taking out a new life assurance policy?” is a question I regularly get asked. Once you have been accepted by a life company, paid the first premium and the policy has started, you are covered. In essence, if you die the first day of the policy you are covered.

Procrastination

In many cases, people are happy with the advice and just don’t get around to proceeding with it. If people follow up with me (sometimes months after initially showing an interest), the usual response is that “I was really busy and I completely forgot”. After all, who wants to spend time contemplating how much life cover or serious Illness cover their family might need ?

Commissions

“How do I know that you won’t just choose the policy that pays you the most commission?”. I was asked this once, but would imagine it’s a question that some people ponder in relation to brokers. If you are unsure I recommend that you ask questions. A letter of suitability sets out why a broker would choose a specified company/product over another. You could also ask what the broker is being paid to place business in a certain place.

Trust/Confidence

A lot of events have happened in the financial services sector which have left many people with an understandably fragile confidence in the industry. It is clear that some people feel that brokers are guilty by association, which is understandable.

If you have never used a financial broker or have been disappointed with an experience using one and are reluctant to consider it, you have a number of choices. You could do your own research, but potentially lose out on cost saving opportunities only available to brokers. You could ask a friend/relative if they have a trusted adviser you can contact. You can do a bit of both and contact a broker yourself and do your own research (if you are a bit dubious).

You may very well have the most cost effective and appropriate Life Assurance or Pension policy to suit your needs. However if there is a chance that this is not the case, do you think it’s worth exploring alternatives?

Tax Relief on a Life Assurance Policy

Pension Term Assurance is not something that is promoted much, even in my own industry. Not a lot of people know about it, although some people do have Life Assurance cover included in their company Pension scheme. In most cases people keep their Pension savings and their Life cover needs apart but as you will see below, you can keep these policies separate and still avail of generous tax relief.

Is it possible to get tax relief on a Life Assurance policy?

Yes there is a Life Assurance policy that you can take out and get tax relief at your marginal rate of tax within revenue limits. It is called Pension Term Assurance.

So why would you take this kind of policy out?

This is for anybody who wants to have a tax efficient Life Assurance policy. In some cases the cost could be up to 40% less than taking it out as a normal life policy.   

Who owns the policy and who benefits?

The person taking out the Life Cover owns the policy and usually it’s their estate (family) that receives the funds in the event of a claim.

So why doesn’t everybody take out Life cover this way?

There are certain restrictions depending on how it is being setup. You cannot assign this Life cover to a mortgage lender. The term of the cover is restricted to your retirement age (up to 75).

It used to be the case that the cost of Pension Term Assurance was higher than the cost of taking out a normal Life Assurance policy but more recently the gap between costs has reduced in many cases.

If I take this out, do I have to contribute to a Pension aswell?

No, a Pension Term Assurance policy is a separate, independent policy. The premium cost (less tax relief) is the only contribution required.

What about self-employed people?

A self-employed person can take out one of these policies. Depending on your company setup you may require an Executive Pension Term Assurance plan. Some self-employed people can set it up with the company paying the premiums with potential extra benefits (corporation tax relief).

Normal Life Cover v Pension Term Assurance

As you can see there are certain limitations and restrictions, but like a normal Life Assurance policy it pays out a lump sum on the death of the assured. And the key reason that you would take out a Pension (executive for self-employed) Term Assurance over a normal life assurance policy is to avail of the tax relief.

Pensions, are they still worthwhile?

I am working in my office right now and was trying to come up with this month’s segment. My father in law came out to ask how business was and we got talking about Pensions. I was stressing how some people do not really value the concept of saving for retirement. He said, “Thank god I have my Pension secured, I know a lot of people who used to have a good standard of living who are struggling now in retirement”. His words, not mine.

As such I thought I would write about a question that has come up quite regularly from people who have arranged to meet with me to discuss non Pension products. That question is an inquisitive “Are Pensions actually worth paying into?” It is too broad a question to completely explore in this segment, but I will try to at least give people something to think about.

The biggest immediate benefit of saving in a pension is the tax relief you get at your standard rate. To save €100 into a savings plan, you have to invest €100. To save €100 into a Pension would cost up to 40% less after tax relief. You also get tax free growth on an investment in a Pension; you pay regular tax on any growth on normal savings/deposit accounts.

I am finding that some people actually like the fact that they cannot get their hands on their Pension until retirement. That is to say, they know that they can’t spend it impulsively like they would if it was available to them.

One of the things that many people find understandably difficult is putting themselves in their own shoes in the future. Imagine you are retiring next month and you have nothing but the state Pension, how would you manage? Some people have chosen to rely only on rental properties for their Pension and I would suggest that between 2007 and 2012 some of them have had a very stressful retirement.

Saving into a Pension doesn’t have to be your only source of retirement income (you can purchase rental property aswell). I find that once people start a Pension they don’t actually miss the money that they are putting aside. They also don’t think of it as something they can spend now and as such they have started the good habit of saving now for their eventual retirement.

People can argue the merits of saving into a Pension, but I would ask people to really think about how they intend on subsidising a drop in income at retirement. Whether you are an individual or a couple, the same conditions may apply once you cease working. The big question is will you have saved provisions to subsidise it.

Life Assurance Q & A

The following are some of the most frequently asked questions when people are concerned about getting new or replacement Life cover.

A big concern of many people when they are considering changing their life cover is whether or not they lose out by cancelling a Life Assurance policy that they have had for years. The first thing to understand is that once you have completed a Life Assurance form as honestly (medical questions) as possible and once the first premium has been paid, you are instantly covered. That includes even if there is a life assurance claim after only a day of having the cover.

The main benefit to holding onto a Life Assurance policy that you have had for years would really only be if your medical status has deteriorated from when you took it out.

The leading question after this can be is it worth applying for Life cover if there are medical conditions personally or in your family that may affect a Life cover application? Some people do not even make an application for Life cover for fear of getting some sort of medical penalty.

There is little to be lost by applying for the cover, whether you are penalised or not. You do not have to proceed with the cover if you are not happy with the extra cost and it may be a penalty that might only be valid for specified time, which would at least give you an indication of when you will be able to get cover without the penalty.

There are different options for people who have medical conditions that may limit their access to Life cover. There is a Life Assurance company that only offer Life cover to people who have been declined Life cover completely. There is also Life cover for people over the age of 50, who are guaranteed Life cover, without being required to supply ANY medical evidence. It can be quite stressful being declined Life cover, but it is comforting to know that there are alternatives.

Look out for us on facebook under Drumgoole Financial Services Ltd where you can find more information, competitions and tips.

Life Assurance that continues after you stop paying premiums…

I have received many queries about different kinds of Life cover over the last few months. There are different kinds of Life Assurances, but most recently there was a specific one (reviewable life cover) highlighted on the Joe Duffy show. Very long story short, the cost of this cover is reviewed every 5 to 10 years and in most cases the monthly cost increases, particularly when a person is getting into their retirement years.

The normal alternative for people is to take out a different whole of life (non reviewable) cover or a cheaper Term Assurance option. In these alternatives you have to keep paying the premiums until either there is a Life Assurance claim or the policy term finishes.

But there is a third option that has recently been made available; it is a life policy whereby you take out cover for a specified period of time. After this time elapses you will stop paying premiums, but you will continue to have life cover so there is a guaranteed pay-out on death.

Factual Example:

Male – Aged 60 – Non Smoker - €50,000 Life Assurance for 20 Years - €77.18 per month

In this example the person has €50,000 life cover during the 20 years while they pay their €77.18 per month. After 20 years, this person stops paying the €77.18 per month and they will continue to have €20,000 Life Assurance. The total maximum premiums paid during this term will be €18,523, yet once all the monthly premiums are paid; there is a guaranteed life assurance pay-out of €20,000.

As with all life assurance applications, this is subject to medical underwriting. Some people decide not to even apply for Life Assurance because they think they may be hindered by a personal or family medical condition. This is not always the case; you have nothing to lose by sending in an application and finding out one way or another.

Some people like to target their retirement age (65-75) so that the cost of the cover will cease around the time their income reduces at retirement. This sort of cover can be taken out for as short as a 10 year term (so in the above example the cover would last for 10 years after which they would stop paying the premiums and the €20,000 Life cover would continue).

The biggest advantage to this cover is that you know from the start exactly how much cover you will have at all times and how much it will cost. The monthly cost and the cover will remain the same unless you choose to have an increasing option (where the cover increases yearly).

If you have a Mortgage you should read on...

I had a text from an old friend recently asking if I would like to play some football with him. I was delighted as I have been looking to get into a local 5-a-Side group recently. The day after the game, while nursing sore limbs, I got a call from my friend. He said that he had long thought of reviewing the life assurance policy that he took out when he setup his mortgage and it only occurred to him after playing football with me that I was a financial adviser who could possibly save him some money.

He emailed me his basic details – Date of birth, smoker status, total cover and remaining term on the plan. He was paying €49.49 per month and very long story short when I quoted him a current price it was coming in at €17.07 per month. There were numerous reasons why the cost decreased, but he was extremely surprised by the significant drop in cost.

There are other reasons where the topic of Mortgage Protection can come up in conversations. I met up with a person in their late forties, to discuss their Pension needs. During the meeting they asked me “are you obliged to have Mortgage Protection cover with a mortgage”. There are certain exceptions, but in general your mortgage provider would expect you to have a policy to cover your mortgage.

This client didn’t have any mortgage protection cover and stated that in the event of her husband’s death she would get “half of his pension”. I asked would this, coupled with her current salary be enough to service her current mortgage. It certainly made her think and she asked me to send her out a quote for mortgage protection cover. Much to her surprise, it was relatively cheap at €28 per month for both herself and her husband.

I suppose what I am trying to say is that its prudent to regularly  consider either taking out new or reviewing your life assurance needs.