Mortgage Protection (Which Policy?)

When someone is taking out a mortgage and there is a requirement by the lending institution to have Mortgage Protection, the question often arises as to whether it is better to put in place a basic ‘decreasing term’ policy, with life cover only, or whether it is more advantageous to go for a policy that provides more cover than is legally required.

Up to recently, all lending institutions took an assignment over the policy so that, in the event of the early demise of the life insured, the policy benefits were paid to the bank or building society. In other words, the lending institution received the sum insured and the mortgage was cleared.

If there was any excess of cover, over and above the amount that was owed, this was then paid to the estate of the deceased person. If you missed a premium on the policy, the lender would have been notified and they in turn would have taken steps to ensure that the premium was paid and the policy kept in force.

The current requirement is that the policy must be in force at the date the mortgage is being draw down. Some lenders are no longer taking an assignment on the policy and it is totally up to you to ensure the premiums are paid and policy is current. However, it would be foolish not to keep the cover in place. It may be even irresponsible, if there is more than one person named on the mortgage and there are dependents.

Going back to the original question; it is my opinion that, in general, a policy that is needed as a requirement to a particular credit transaction should be on a stand-alone basis. If the requirement specifies Mortgage Protection Life Insurance, then this is what you should give the lending institution.

Before you apply for a mortgage, you should do your research on the different types of policies that are available. Too many people leave it till the last minute to fulfil this requirement. They end up buying a product that may not be suitable to their circumstances and pay too much for it. They do have the option of replacing the cover with something more suitable at any stage; and there is no requirement to buy the product from the bank or building society that is lending the money.

If you decide that you need (and can afford) additional cover, be it life insurance or specified illness cover, then you should factor in other cover that you may have in place already and any cover that may form part of your contract of employment e.g. death-in-service or salary protection.

I don’t like ‘bundling’ products together with the one product provider as the costs for each of the individual component parts may not be competitive in the overall picture. Others may disagree.

Taking The Plunge !

You have decided that you want to invest a lump sum and you are happy that you will not need to call on these funds for a good number of years to come. You understand that the value of these unit-linked funds can fall as well as rise. You are aware that you should diversify your investment so that all your eggs are not in the one basket, just in case one particular asset class takes a nose dive.

The problem you are faced with is in deciding which product to invest in as there is a multitude to choose from. The following are some of the factors that you should consider, before you take the plunge.

Investment Style

You can choose ‘Active’ or ‘Passive’ management for your investment. Some companies will allow you to combine both styles under the same product. ’Active’ refers to the involvement of a fund manager in the selection of assets that make up the fund. With a ‘Passive’ fund, your investment tracks the performance of an ‘Index’.

Much has been written about these two investment styles. The determining factor is in whether you believe a fund manager can add value to your investment through his or her decisions. Active management tends to be more expensive so also bear that in mind.

Diversification

Does the product allow you to spread your investment by region, sector, and asset class or investment style?

Flexibility

Does your investment permit you to redirect or switch funds easily? Does it allow you to add to your existing investment, if needs be? Can you make partial withdrawals without penalty and where can you get the value of your investment at any particular moment in time? Are there any restrictions on how much money must remain in the investment to keep it ‘live’?

Charges

How much of your money is invested in the product from day one? What are the management charges for each of the funds you are interested in? How much commission is paid and can this be negotiated? Are there early encashment charges that would penalise you in the event of a partial or full withdrawal of your funds? What charges apply to switching or redirecting funds? Are there any incentives for you, in the form of extra allocations, for large investments?


If you have all the answers to these questions and you are happy that the product offers good value and is suitable for its intended purpose then you should be able to take the plunge, with the parachute.

Education Fees

With all the talk about the re-introduction of Third Level Education Fees, perhaps it is time to give some consideration to designing an appropriate savings product that would give some incentive to those that wanted to fund for a childs future education.

I do not think that it would be too difficult to get all relevant parties to sit down and thrash out an agreed structure. All the 'dots' are in place, so it would just be a matter of joining them all up with straight lines, right?

Here is my 'proposal' for a 'DESSie', Designated Educational Savings Scheme.

The Designated Educational Savings Scheme would allow Donors to fund for the future educational expenses of a named Beneficiary.

Anyone could contribute on behalf of a named beneficiary to a 'Designated' Deposit Account or Unit-Linked Fund. The Deposit type account would be similar to those offered under the SSIA Scheme and Banks/Building Societies would compete on interest rates.

The Unit-Linked funds could be either an Index Tracker or Managed type fund with a maximum annual management charge of 1.25% and no other charge.

The accounts that the funds are invested in would accumulate tax free and would be distributed tax fee for qualified educational expenses. These expenses would include tuition fees, books, supplies, equipment and accommodation for Secondary or Third Level Education.

A ‘non-qualifying’ expense could be taxed at 41%(?). The only exception to this penalty would be on disability, death or where the beneficiary attained a scholarship. That is, no tax on the funds if any of these events arises.

The current system allows for gross roll up on these funds where the tax is payable on the 8th Anniversary of the plan at the rate of 41%. Deposit type accounts are liable to D.I.R.T. These should not apply to a DESSie

An account would have a lifetime contribution limit of €20,000(?) and the funds must be used by the 25th (?) birthday of the beneficiary. The payment can be a single payment, regular payment, or combination of both.

It would also be a requirement that these plans are transferable to other family members for qualified educational expenses as the named beneficiary may not, for instance, go on to third level education.

The accounts would have a minimum term of 5(?) years before any distributions are made from them. Distributions before this date would be taxed @ 41% (?).Life Offices and Banks responsible for collection.

Please add your comments and ideas.

Thanks.

Brendan Investments (The Voyage)

Twenty three years ago, I got my first introduction to the world of boats and yachts through the Atkins family that own the Fred J Dion Yacht Yard in Salem, MA. The whole experience was fascinating for someone that was just out of college.

When winter approaches, the yacht owners can either take the boats out of the water to protect them from the elements or set sail for somewhere like Florida. These boats are precious to their owners so careful consideration has to be given as to what the best course of action should be.

When I started to read the latest newsletter from Brendan Investments, I was anxious to read about how far out to sea they were and how the voyage was progressing to date. I was preparing myself for some spin on how much less water was in the bilge of 'The Brendan' as opposed to some of the similar product offerings that set sail at the same time. That's what happens when you set sail in a tempest, you start taking on lots of water.

I was pleasantly surprised to read that 'The Brendan' was still at the pier, in the harbour. The water is just gently lapping against the hull and the crew are waiting for the right moment so that they can hoist the sails without fear from the elements.

As an investor I am happy about this, as I have confidence in the crew. It also reinforces my belief in how important it is to carefully select an investment opportunity, and not jump in to the first proposition that comes along.

Anxious investors will probably question, why the crew are taking their time in actually buying property, but sometimes it pays to be patient as this presents greater opportunities that may appear on the market.

The stated time frame for the original investment was between 7 and 10 years and if a better opportunity arises because we have to delay getting our feet wet, then so be it. It is my opinion that the decision not to invest in real property, to this point, with the funds available is the correct one.

The tide has not gone out, and I would expect that the 'owners' and crew of 'The Brendan' will be suitably rewarded, with the correct navigation equipment.

PRSA (Bashing)

It is rare these days to find a positive piece of press about the humble PRSA. Indeed, I cannot recall that many laudatory articles since they were introduced, back in 2003.

This has got me wondering as to why some sectors of the media are constantly portraying the relative success of the PRSA, as less than impressive. A recent article used such words as 'PRSA debacle' and 'abject failure' to reinforce their arguments against the relative success of the product.

Let's be clear on one thing, I do not think that anyone, who understands pensions, is deluded enough to think that the introduction of a new pensions product, in isolation, would be a panacea in increasing pensions coverage.

There has always been a problem with getting people to put away money for their retirement, as the soft option is to rely on the State to sort that out for us. Survey after survey tells us that, we are aware that there is a need to make some private pension provision. Alas, this was not likely to happen, when the country was caught in the euphoria of an earn and spend cycle for the last number of years.

'Pension Coverage' is an issue for everyone, and not just one for the Pensions Board or pensions industry to sort out, we all have to play our part. The critical issues, as I see them, are education on pensions , creating an ‘awareness of need’ through publicity and introducing tax-relief equality measures for the lower paid.

There has never been a better time to push the 'pension coverage' issue to top of the agenda, as there is nothing like a mini-recession to focus the mind on the future. The Pensions Green Paper has to look at the inequities of the tax-relief regime. If there is any intention by the relevant Department to defer actions on coverage due to the current economic climate, it is my opinion that this would be a monumental error of judgement on their part.

As an industry practitioner, I welcome any effort, from any source, to increase coverage. The introduction of the PRSA, five years ago, has been a revelation for consumers. There is no doubt that pensions coverage has increased, albeit in a manner that is probably too slow for those who are critical of PRSAs. There has also been a massive indirect benefit to consumers in the form of downward pressure on charges on pension products.

Between June 2005 and June 2008 there was an increase of 136% in the number of PRSAs taken out. This increase was achieved despite the fact that there was only ONE PRSA Product Provider who actively marketed their offering. There are, probably, still product producers that are willing the humble PRSA to fail as they don’t like products that they haven’t wholly designed themselves.

The PRSA naysayers are critical of the way the product has ‘missed’ its intended market. They cite the self-employed as being buyers as opposed to the lower paid. Any increase in coverage, however serendipitous, is to be welcomed, especially if it means that the consumer is getting a more competitively priced product. It could also be that those that are price sensitive and more au fait with the products see the merits of the PRSA.

In summary, to describe PRSAs, in isolation, as an ‘abject failure’ at this stage of the process is a bit premature. It is not helpful to those that may be considering putting one in place, as it makes it easier for the consumer to defer the decision on pension to a later date.

As I said at the start of this article, we all have our part to play on this issue. A change of focus, to assisting others who do not have the knowledge or awareness on pensions may go some way towards achieving the intended targets for coverage.

NB : Do bear in mind that I have a vested interest in the subject matter of this article.

Kids & Money (WebKinz)

My 7 year old daughter recently received a ‘Webkinz’ toy as a birthday gift. I had never heard of this product up until then. When she started asking me about getting access to the ‘Webkinz World’ website, with her ‘secret code’, naturally, my curiosity was aroused.

So, we logged on to the site and we went through the process of registering. This included naming and ‘adopting’ the virtual equivalent of her stuffed toy. Once this procedure was finalised, she now had access to a whole new virtual world that had its own economy and currency.

Her virtual pet is given its own empty room and she is also allocated a small budget of ‘KinzCash’. The first thing she did with the money was going shopping for food, clothes and furniture.

She did not have enough money to buy all that she wanted so she had to ‘earn’ some more by partaking in daily work activities, answering general knowledge questions or playing on-line games. The work activities generate the most cash but, if you can’t do them correctly you don’t get paid and you have to wait 8 hours before you can have another go at them.

I left her log on for a few days on her own and when I revisited the site with her she had ‘earned’ more money and bought some additional items for the pet. There are three ‘barometers’ relating to the way the pet is feeling which are viewable when you log on. If the pet is hungry or unhappy, the barometer tells her this and she decides then what she must do about it, ie. buy food and feed the pet .

Her next step was to find out about adding a yard so that the virtual pet could play outside. She found out that it would cost ‘KC’1,000 to add the yard so now that is her target for the money she is earning and saving. We also had a look at what she had bought already and decided that there was no need for multiple clothing and footwear items. She decided to sell some of these and the money was credited to her account.

This is where we are, to date. She nearly has the 1,000 for the yard but I am not sure that she realises that she will have to fit it out with a pool etc. and that this will require a lot more money.

I like the idea that she is learning about responsibility for her virtual pet (keeping the pet happy and fed) and earning money to pay for things that she needs. I particularly like the concept of ‘selling’ the excess clothing and footwear because, she realised that it was not needed and the refunded money was more important for the yard project.

I am sure that we have a lot more to learn about this virtual world and that there may be some concerns about usage. For the time being it’s supervised fun and as soon as I have an update on our progress I will let you know.

Early Learning (Money)

Personal Finance can be a pretty boring subject. With the best will in the world we try to get a handle on the subject but all of a sudden it becomes all to much. We abandon our research in favour of the issues that are more immediate, and once again our financial 'plan' is put on the long finger.

I do not know where my own interest in this subject came from, it was a career path that I stumbled into. I had some luck along the way, the support of a few individuals who put their faith in me and gave me some direction.

I can't recall any distinctive episodes from my childhood that would lead me to believe that the area of finance was a high priority in the Sheehy household. My father and mother both worked very hard in their respective roles. If there was something that the family needed to make our lives more comfortable, I am sure that the pros and cons were weighed up by both of them and a final decision was arrived at.

That said, I am almost certain that my attitude towards money, in particular not wasting it, was formed in those early years from watching and listening to what was going on around me. It probably made no sense to me at the time but the principles of economising and saving were firmly set in my mind to be drawn on at a later date. I can also see that my siblings were influenced by the same principles, as thrift wins the battle over extravagance.

These basic financial 'skills' are not just particular to my early years. I am sure that they were there for many of you and that it is only a matter of time before they come to the surface, hopefully it does not hit you too late. You can always force the issue by applying yourself and gaining more knowledge on the subject.

For those of you that are parents, be aware that your kids' adoring eyes and ears are open to how you are dealing with money issues. I am not for a minute suggesting that 'Loot!' forms part of their bedtime reading, but rather that you try and offer some example in how to deal with money. Simply talking about it will make them realise that it's normal for them to ask questions about money.

I believe that there are steps being put in place to try and introduce the subject of personal finance at curricular level. We can't just leave it to someone else though, we have to take some responsibility and educate ourselves and our children.

Asset Building

Successful asset building is based on building up diversified investments over a prolonged and gradual period of time. Putting all your money into one asset class, in one market (think Irish Property), is not the foundation on which to build your investment portfolio.

It is very difficult to convince someone early in their working life that what they need are investments that include diversified, lifelong strategies that cover domestic and international money markets. It is my opinion that this is the correct course to take.

If you understand the message that Aesop's fable of 'The Hare and the Tortoise’ conjures, then you will have a distinct advantage over those that bite off more than they can chew. That message is 'Slow but Steady Wins the Race'.


Everyone should give themselves time to build their assets and not be looking for the 'quick buck' or the immediate gratification that a risky proposition might bring.

Consumers should try and build up short-term savings and/or invest in low-cost medium to long term funds. It gives them more options, when and if, they decide to purchase a property and allows them the scope to handle the uncertainty that unexpected financial events may bring.

100% mortgages are no longer available. Hopefully the banking fraternity and their regulatory masters will learn from the errors of this lending policy.

If house purchase is a financial goal you are going to have to get the deposit from somewhere. A mortgage applicant with a history of saving/investing on a regular basis will stand a better chance of gaining approval, in my opinion.

Pension Survey (Part 2)

These are the estimated fund sizes for each of the products available based on what the consumer could buy from each provider by having the maximum allowable charges applied to the policy.

Again, there were 131 contributions of €500 per month and the assumed growth rate was 6%.

Product Source - Fund

www.prsa.ie - € 84,246

Quinn Life - € 83,905

AIB - € 81,792

BOI Life - € 81,687

Eagle Star - € 77,537

Friends First - € 76,795

Irish Life - € 76,485

New Ireland - € 76,450

Canada Life - € 75,565

Standard Life - € 74,262

Hibernian Life -€ 73,793

Acorn Life - Not Available

These are the most expensive versions of the products, so the higher the estimated fund the better the product is, in value for money terms.

Please refer to Part 1 of the survey so that you can compare the execution-only results.