SL writes from Dublin: After five years of renting here in Dublin and my husband and I are in the process of buying a house. We have mortgage approval from Permanent TSB (€200k over 20 year term) and are using our savings to finance the balance. We have a 16 month old son and another baby due in April so we want to keep our mortgage repayments to a minimum to allow us continue saving for family expenses (childcare, college fees etc).
My question is this, can you provide an overview of life insurance and mortgage protection requirements?
Being completely new to this it would be great to get some solid advice on what is required and what is the best way to proceed in terms of choosing a provider. I’m reluctant to just take the convenient option and go with PTSB product.
In your loan offer, your lender will stipulate the requirement of having life assurance in place to cover the loan. There are two cost effective methods of protecting your loan.
(1) A mortgage protection policy is a form of life assurance where the amount of cover reduces in line with the outstanding balance on the loan. For your loan of €200,000 over 20 years a broker could arrange a policy for around €14 a month. The main advantages of taking out this type of cover is the low cost. A possible disadvantage may be if you have to restructure your loan you may also have to change your policy.
(2) The second most common option is a level term policy. This type of cover doesn’t decrease and so it costs slightly more, about €22 a month. The main advantage of this type of cover is if for some reason you have to switch to an interest only loan you’ll probably find the policy will still be sufficient for your needs. The disadvantage is that sometimes people are lulled into a false sense of security in being lead to believe this policy is sufficient for the loan protection requirements and their own needs for life assurance.
In the second part of your question you asked for an overview of life assurance requirements to protect your family.
The most basic form of life assurance is a product called term assurance. A mother and father can be insured on the same policy where the benefit remains uniform throughout the policy term. Policies which cover you on what is called a dual life basis although fractionally dearer than a joint life policy offer arguably much better value for money because of the amount of total potential payout.
The aim of the policy is to provide funds for the survivor to bring up the family. I’d strongly recommend purchasing a policy which includes a ‘conversion option’ or better still some providers now offer an option called a ‘rolling conversion’. This is a method of guaranteeing future insurability even if bad health means you are no longer insurable.
Give careful consideration to the pros and cons of including serious illness cover on your policy. Policy definitions and exclusions mean they do not pay out as easily as you think. As a more affordable alternative some providers can offer just cancer cover. Please think twice about optional ‘add-ons’ such as hospital cash, personal accident, surgical cash or permanent disability benefit add-ons.
At today’s rates a 30 year old couple should be able to obtain a dual life policy covering each person for €750,000 guaranteed over 20 years for a monthly premium of only €50.40. Include a ‘rolling conversion option’ would cost another €4.28 a month.
Ask your broker to advise you if there are any tax implications of a lump sum payment on death and to see if it would be more beneficial for you to set up your policy in trust.
A child’s savings policy started when your child is born could help build up an education fund for second or third level. Parents, grandparents, godparents or any relation or friend of a child could contribute. If you legally assign such a policy to a child your contributions count as gifts so you can make full use of your annual gift tax exemption limit.
Aviva, Irish Life, New Ireland, Standard Life and Zurich offer regular premium savings products which start at around €50 a month and which in some cases have the option to add smaller lump sums. Many parents start such a plan with their Children’s allowance.
Some clients would also set up a low risk, easy access account with An Post or the Credit Union when a child is born and on special occasions such as birthdays etc instead of presents, relations would lodge money to the account. When the fund is large enough the proceeds would be transferred as a lump sum investment into another packaged asset backed investment which met their particular objectives and risk profile.
If you go down the insurance route then you need to be sure you won’t need to realise your investment early to pay bills or to be panicked into selling at a loss on the first down turn in the market.
Where to get advice
There is a slow change on way where intermediaries are moving towards being advisers and working for the client rather than being sellers and working for the providers.
If you don’t have a personal recommendation then a good starting place is consumerhelp.ie. They have a helpful section on ‘Getting financial advice’ and they also have a link to the Central Bank’s register website.