Monday, July 7, 2008

Indexation Caveat

If someone is considering taking out life insurance they will also have to decide if they would like to have the cover ‘index linked’. This option allows you to increase the value of the cover you are buying today so that it keeps pace with inflation.

The option does not apply to mortgage protection (decreasing term insurance) as the cover reduces over the term to reflect the decrease in the balance outstanding on your mortgage.

I did a review of the Term Insurance rates available from the life offices, based on their quotation software as at 4th July and what I found is that, choosing the lowest premium at the outset may cost you more over the full term of the policy.

All the companies surveyed increase the cover by 5% per annum but the rate of increase on the premium can vary between 5% and 8%.

What does this mean in practical terms?

On the calculation that I did, the cheapest initial premium was €30.07 per month but the premium increased at 8%. One of the more expensive products was priced at €40.55 per month and this increased at 5%.

The total premiums paid, over the term of the policy, for the ‘cheapest’ (at outset) product was €16,512.76 and the total paid for the more ‘expensive’ product was €16,095.24

What can you do?

a) Choose a higher level of cover at the outset and ignore indexation
b) Keep a close eye on the rate of increase for the premiums
c) Get a few quotes and study the ‘disclosure’ document on costs and charges
d) Ask an advisor to find the policy with the lowest ‘total premiums paid’ for the duration of the plan
e) Watch out for policies that state the increase in premium/benefit will be 5% or by such amount as the Actuary deems appropriate. This can really come back to bite you.

2 comments:

Aisling said...

Hi, I am currently looking into Life Assurance for my partner and I, aged 32 and 37. We are unmarried and own no property in Ireland however we have a property together in Italy. The problem I've come up against is that as we are unmarried we are not entitled to anything in the case of the death of either party. We do have the option to name the other as a beneficiary but this will be subject to inheritance tax. Do you know is there any way around this?

Gerard said...

Aisling,

I would probably contact the Inheritance Tax section of the Revenue. This is something that you need specalist tax advice on but, from experience, the Revenue are very helpful. It may also be advisable to put your request in writing to them, outlining your full details and predicament.

I would ask Revenue if it is possible, for both you and your partner, to put in place a Section 72 Life Insurance Policy, to cover any Inheritance Tax liability that will arise, in Italy and here. There should be no problem with 'insurable interest' as both of you would suffer a financial 'loss', in the event of a death.

Before you call them you should familiarise yourself with the Italian tax rules on Inheritance, and in what jurisdiction you would anticipate the bulk of the liability to arise.

My initial feeling would be that this Section 72 policy (set up correctly) may be the answer you are looking for.