This article was originally published in the Defence Forces Magazine.
In my article last March I stressed the importance of evaluating ones outgoings and expenditure to ascertain where one could save money during this ‘belt-tightening period’.
The reality is consumers have changed their shopping habits in the post Celtic tiger years. There has been a seismic shift in the number of consumers who have moved from Superquinn to alternative stores such as Lidl and Aldi. The fundamental reason for this is price.
Consumers are able to draw direct price comparisons between one product in Superquinn and the exact same product in Lidl. In financial services the reality is somewhat different. The reason being is the perception that financial services products are complex or difficult to compare, this is true with some products such as pensions. However, on close examination, products such as Life cover can be reviewed and the particulars of it can be analysed. Unfortunately, many consumers shy away from this because of the perceived complexity of it.
It would be fair to say that most consumers do not understand the type of cover they have, the extent of the cover, or the length of the term of the cover. Life cover in its simplest form pays out a lump sum benefit in the event of a policyholder’s death. There are various types of life cover. Mortgage protection is the cheapest form of cover as the benefit decreases over time in line with a mortgage.
The policy is designed to ensure there will always be sufficient cover to clear the outstanding mortgage balance should the policyholder pass away at any stage during the term of the mortgage. With level term cover the benefit remains the same for the term of the policy. Both of these types of cover are for set periods which are clearly defined when the policy is set up.
Whole of life cover has no fixed term and premiums continue to be made by the policyholder up until a claim is made. There is often a savings element to this cover. ln my view this type of policy is archaic. The main problem with these policies is that they tend to become very expensive as one gets older and reviewing them is imperative before premiums become unaffordable.
Why review mortgage protection policies?
It is important to note that the cost of Life cover has decreased in recent years. Policies that were activated a number of years ago should be re-examined. Although the policy holder is older now than at the time of taking out the policy, the balance has decreased and the cost of insurance has also decreased.
In addition, Financial Institutions such as AIB is tied to the Life assurance Company Ark Life, and Permanent TSB is tied to Irish life. Therefore, consumers who took out mortgages through AIB and Permanent TSB are likely to have their mortgage protection policies with Ark Life and lrish Life respectively.
These insurers may not have offered the most competitive premiums at the time. However, as tied agents of AIB and Permanent TSB were unable to offer mortgage protection from any insurer other than Ark Life and lrish Life. For this reason alone, consumers should re-examine their policies.
“A person only has to refrain from smoking for twelve months to qualify for non-smoker insurance rates”
They may have affected a life cover policy as a smoker and paid into the policy for a number of years. Once they give up cigarettes for twelve consecutive months, they can approach their insurer and now qualify as a non-smoker.
Why review whole of life policies?
Many of these policies were set up and paid by the policyholder by way of salary deduction. This was ideal for the insurers and convenient for the policyholders. We have seen recently where insurers such as New Ireland have ceased to accept premiums by salary deduction. It is only now
that policyholders are realising the real cost and poor value of these policies. Many employees in the CIE Croup and members of the Defence Forces subscribed to these policies. Indeed, the excessive cost of these was highlighted recently by numerous callers to the Joe Duffy show on Radio.
The disadvantages of these policies are numerous. Firstly, they are reviewed every ten years initially, then every five years and in later years every year. At review stage, the policyholder can have the option of maintaining the same level of cover and the premium increases, or maintaining the same premium but the level of cover decreases. In some cases, the cost of maintaining the same level of cover has increased by too%. Secondly, there is often a savings element attached to this cover. The insurers argue the purpose of this fund is to help pay for the huge cost of these policies in later years.
It is important to point out that if a claim is made the value in the fund is deducted from the claim amount. For example, a policyholder who has €5o,ooo life cover and €8,ooo in the fund, if he/she makes a claim for life cover, the insurer will deduct the amount in the fund and his/her estate will only receive in this case €42,ooo. An alternative to this type of policy is a term policy. This type of policy is never reviewed so the premium never increases, albeit the maximum age at completion is 8o. A convertible option can be a very valuable addition to a term policy, as it allows the policyholder the option to convert into a new policy without any medical underwriting.
It is imperative for whole of life policyholders to review their policies immediately, as if they contract an illness they may be illegible to affect a term policy. They can also apply for a full encashment of the policy, thus giving them immediate access to the money in the fund.
“The Life assurance industry is operating in a “soft” market at present… premiums are being reduced as Life insurance companies compete for business”
The amount of Life cover you require changes throughout your lifetime as your circumstances change. lt is important to review your cover on a regular basis to ensure you are getting good value. This represents an opportunity to shop around for cover to try and improve on your existing insurers offering. For example, a reduction of €20 per month on a 25 year policy will save you €6,ooo over the term.
The savings from switching from a whole of life policy to a term policy tend to be greatest. lndeed, in many instances you don’t even have to switch insurers as your existing provider may offer you better terms.
The process is very simple and it is imperative to contact an independent broker rather than a tied agent, who can only offer you the insurance products from the company where he/she works.