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.