Income Protection – the important cog in your financial wheel

We all fund our lifestyle by spending our hard-earned income. This income is used to feed ourselves, to pay mortgages, to pay all the bills and to fund our lifestyles; new clothes, nights out and holidays etc. Our income is also used to pay our insurance premiums and hopefully to pay towards retirement planning! So what happens if we get sick or have an accident and this income stops? This is where income protection insurance comes in. A previous term used for this cover was Permanent Health Insurance (PHI).

What is income protection?
Income protection insurance is a product that in the event of you being unable to work due to illness or accident, the insurer will pay you a replacement income until your retirement date. Most Financial Brokers recognise the importance of maintaining an income and recommend to clients that they have adequate replacement income in place, should they be unable to work. For some lucky few individuals, their employer provides this salary protection cover. For most, they may end up reliant on modest state benefits. Indeed for the self-employed, they are entitled to nothing and as a result they really need to get their own income protection insurance in place.

Is income protection the same as payment protection on a mortgage or other loan?
In a word, no. They are not the same product. Payment protection is a product that was predominately offered by banks to cover repayments on a mortgage or loan. However this cover usually only lasted for a year or so and had quite strict conditions attached. In fact payment protection insurance has a very chequered history and indeed was sold to people who often would never be eligible to claim. You may often see in the media that banks are now being forced to refund customers for payment protection policies that were mis-sold in the past.

Income protection is completely different. It covers your income in the event of illness or accident and the benefit is payable until you recover and are able to work again. If you don’t recover, it is payable until you reach your retirement age. In fact the state is supportive of people taking out income protection insurance. You get full tax relief at your highest income tax rate on the premiums you pay. Now this is one of very few ways left to get marginal rate tax relief on anything!

 How much does it cost?
Like most products, it depends. The premium that you pay will depend on a range of factors such as;
• Your age
• Your occupation
• Amount of cover needed
• Your state of health
• Your choices in relation to a range of policy features

Where do you start? The best way to proceed is to contact your Financial Broker who will explain all of the options available and will prepare an income protection quote for you. And because your Financial Broker is impartial and deals with all of the product providers, they will find the best product for you at the lowest price available. You can then rest easy, knowing that at least your income is secure.

Does a Financial Broker offer a different service than your bank?

Financial advice and the products sold by Financial Brokers, banks and life assurance company salespeople attract on-going and rigorous scrutiny by the media and other commentators. And rightly so! Consumers are placing their trust, their hard-earned financial assets and indeed their future lifestyles in the hands of these professionals, and so the industry deserves scrutiny.

The world in which financial advisers live is a highly regulated world. This is important as it helps build trust. But regulation on its own won’t achieve this; best practice has to also be employed by all of the professionals in the industry to help build this trust. Financial Brokers can at least be optimistic that they are continuing to build a greater sense of trust in what they do. In the internationally renowned Edelman Barometer 2015, trust levels in Ireland in financial services businesses continues to exceed that achieved by banks, and indeed financial services businesses showed the fasted growth rates in trust (albeit from a relatively low base).

So why are Financial Brokers more trusted than banks?

They want to build long-term relationships. Financial Brokers are different to bank salespeople as they are not out to achieve this year’s sales target, as passed down from Head Office to your local bank branch. That is the focus of the bank branch as staff change and move around from branch to branch. A Financial Broker on the other hand will only build a successful business if he or she can build loyal, long-term client relationships. They want to support you and provide financial advice as you go through every stage of your life. Thinking about short-term sales targets can never achieve that!

Their advice is impartial. At the end of the day, helping you to identify your financial objectives and developing your financial plan is only part of the financial advice story. You then need the right products in place. While bank staff only have access to the products of one company, your Financial Broker can find the right product for you from right across the market. This can result in cheaper life cover, broader and more suitable investment choices and better pension planning options for you. Your Financial Broker is solely interested in finding the best solution for you, as opposed to potentially force-fitting you into the only product available from a single supplier, as banks do.

Their sole focus is helping you achieve your financial objectives
Banks lend money, they hold deposits, they sell credit cards and (hopefully) they will give you a mortgage. They are, or at least should be good at all of that. But then the bank branch will also try and advise you in relation to your personal financial affairs.

Financial Brokers on the other hand are singularly focused on helping you manage your affairs and achieve your financial ambitions. That’s what they do, and they will travel on the long road with you as you achieve your financial dreams.

Pension and Investment Lessons from the Economic Crash: A Financial Broker Perspective

Think back to the start of 2008. The economic storm clouds were getting darker, there were rumblings about losses building in banks across the globe and investors were beginning to get nervous. And now race forwards 7 years and consider the lessons to be learned with the benefit of hindsight. Like all lessons, these are lessons that can easily be forgotten again!

Research has shown time and time again that “stock picking” investors rarely out-perform the market. Yes some hit lucky and beat the market, but the majority would be better off in a fund that tracks a stock market index, or a professionally managed active fund.

Why is that? At the end of the day, people make poor investment decisions because they are human. They see stock markets racing ahead, and then decide to buy in. Or indeed (as during the economic crash) when there are huge falls in the market, investors decide to jump ship. And of course this is exactly the opposite of what we should do, i.e. buy low and sell high. Your financial adviser will help you to do the right thing, and often that might be to sit tight and do nothing at all. 

Every Financial Broker will know the horror stories of one-way bets and sure things. Surely, if you had a genuine one-way bet, you’d tell no one about it! So the “guaranteed” returns that were coming from apartments in far-flung places and the certain returns from Irish bank shares were shown up for what they are – investments with risks attached, just like all other investments. Your Financial Broker will ensure you have a diversified investment portfolio that matches your risk tolerance. They will caution you against these “sure things”!

In the past, when people were asked about the amount of risk they were happy to take, they bullishly took on more risk, with the hope of gaining greater rewards. However the folly of this approach was laid bare when the crash came and investment losses increased. Many investors realised that they were ill equipped to deal with these losses, either financially or emotionally.

Having a Financial Broker in your corner will help take the emotion out of your investments. Their financial advice will be based on experience and knowledge of the highs and lows of the markets over many investment cycles. Their only interest is in your financial goals and objectives and how best to achieve them. From their experiences as a financial adviser, they have learned that there is no quick route to success.

Instead they will bring rigour and a structured methodology to the financial advice that they offer. So apart from fulfilling their traditional role as your financial adviser, a Financial Broker can be your financial conscience!

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.