Savings options to ensure a stress-free retirement
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How much is peace of mind worth to you? Stress and worry come in a variety of forms.
Over the past year, the top stressor for the world's populations has been of course Covid-19. According to IPSOS ‘What Worries The World? August 2021’ survey, on average 37% say that Covid-19 is one of the most worrying issues in their country today.
The second most popular worry is an age-old fear of unemployment, this fear has undoubtedly been exacerbated to some degree by the disruption to the global economy resulting from Covid-19. Other major worries that all peoples bear include the worry of poverty and social inequality and the worry of obtaining adequate healthcare.
What have all of these worries in common? Forward planning, and financial planning can play a big impact on alleviating the stress brought about by these events.
Perhaps the simplest form of financial planning is having a bank of savings on hand to deal with whatever life throws at you.
While that strategy is simple, it’s not easy. The alternative to having money at your disposal to solve all of your potential problems is to either run the gauntlet and hope for the best or to consider is there an insurance policy that is fit for purpose.
Of course, financial product providers have an incentive in selling products to us as customers, after all, they are in business to sell products and derive a profit from their business. It’s up to you as a consumer to decipher for yourself, does this financial product meet with your needs and expectations?
Is there an alternative product that might better suit your needs?
Is the premium good value and what are the prospects for premium inflation in the longer term?
Below, I explore life assurance and life insurance, as well as serious illness and permanent health insurance products with some pointers worth considering.
Life assurance or life insurance, what's the difference? The word assurance is used where there is certainty as to the outcome, i.e. I can assure you that you, I and everyone else will peg it some day.
Therefore, the phrase life assurance is commonly used to describe policies that are guaranteed to pay out, which the person subject to the policy dies on the assumption that premiums for such cover continue to be paid.
On the other hand, life insurance policies generally relate to policies that will cover you for a certain period of time known as a term.
Term life insurance policies are commonly taken out at the insistence of a mortgage lender. The reasons here are pretty understandable, if you peg it your mortgage is cleared.
Given that the statistical probability of you dying during a term of your mortgage is significantly lower than the certainty of you dying more likely than not at a later point in life, the relative monthly premiums are much lower with life insurance than life assurance.
As a general rule of thumb, it is worthwhile pricing and repricing your mortgage life insurance policy with a variety of providers both prior to taking out the policy and indeed during the term of your mortgage.
Understanding how your policy works and understanding whether your premiums will increase later on in life is key.
Apart from taking out a life insurance policy to cover your mortgage, there are a variety of very good reasons to take out additional life insurance cover, such that your spouse or partner and any children you may have would in the event of your untimely demise have a financial pot to help cover life’s costs.
For a married couple, the State does offer some support in the form of Widows, Widowers or Surviving Civil Partners pension payments — this State payment is not means-tested and can provide meaningful financial help.
The nature of family units and relationships in Ireland in 2021 is more varied than at any time in our nation’s history and the social welfare system does not cater well for alternative situations.
Take for instance a couple who have two children, who are not married and not in a civil partnership, who own a house mortgage-free as a result of a loan from one of the parents of the man.
In the event of the untimely passing of the man, his life partner is regarded as a stranger for gift tax purposes, and assuming he has made a will leaving the property to his partner she will have an inheritance tax liability at 33% on the excess over €16,500 (the lifetime tax-free limit applicable to third parties).
Meanwhile, the loan granted by the parents is repayable out of the estate of their deceased son, forgiveness of that loan confers a taxable benefit on the surviving partner. If no will was prepared, the house is transferred equally between the two children with the life partner having no automatic entitlement to the property albeit they can pursue the estate as a cohabitant.
A life insurance policy would make a lot of sense here, whereby on death a lump sum is paid out to the deceased person's partner I order to assist them in paying any tax due on the inheritance of the property or in order to provide them with financial security in the event that the property is transferred to the children.
Be careful some life policies will only allow a spouse or civil partner be nominated as the beneficiary of a policy. Remember too that the proceeds from the policy itself will be a taxable inheritance, adding a further 33% tax in the process.
Good tax planning such as cross insuring each other will help prevent layers of taxation from applying unnecessarily. Remember too that insurance policies will lapse where premiums not paid on time and up to date — this can be particularly relevant where a person suffers ill health combined with a drop off in income prior to their ultimate demise.
As highlighted atypical couples who would not benefit from the State Widows/Widowers and Civil Partners pension might find it useful to have sufficient life cover in place, but sometimes the classical relationship archetypes might too fall foul of the rules.
Say for instance a young married couple returning from working in the Middle East for a period of ten years might not be aware that their lack of PRSI paid in Ireland or other qualifying countries conspires to leave them totally void of such a widows/widower’s pension for at least five years.
It's worthwhile checking out whether the policy you have or are about to sign up to have useful add-ons. Some life policies allow for the term of the policy to be extended, beyond the original term requested by the insured, the insurance companies may also waive the requirement for the insured to have a medical as would be standard procedure for new life policies taken on later in life.
Some policies can be transferred allowing say children to continue to pay the premium on their parent’s life assurance policy. Some joint life assurance policies will pay out on the death of the earliest insured person. Some life policies are linked directly to the amount of remaining balance owing on the mortgage while other policies pay out a set sum regardless of when the policy is invoked. The variety of different options and add-ons gives consumers great choice.
Serious illness cover pays out where the insured has suffered a serious illness as defined by their policy. These types of policies are to my mind of limited benefit. There are ultimately three states of ill health one can fall into, either sick and recovering, permanently sick or sick and dying.
For the former state, critical illness cover might be useful in terms of generating a boost to household cashflow, but unless your illness has been severe it’s unlikely to have been covered by the policy, some employees will benefit from employer sick pay schemes or State illness benefit which can help with cashflow during a bout of illness.
For the middle state, serious illness cover should kick in and will be useful in the short term to help adapt your home and get in additional healthcare support, but remember some debilitating illnesses which might prevent you from working such as back pain or a hernia would not be considered under many policies to be a serious illness. The nature of the policy is such that a lump sum is paid out to your and you are effectively on your own after that.
In such circumstances, a permanent health insurance (PHI) policy would to my mind be more beneficial but this hinging on the basis that a broader definition of sickness is available in the policy selected.
Permanent Health Insurance (PHI) as mentioned above is a type of insurance policy that pays out a regular income if the individual insured suffers a loss of earnings due to sickness or disability lasting longer than a predefined deferred period. The deferred period can be 13, 26 or 52 weeks. The shorter the deferred period, the higher the premium you will pay, the more risky your occupation the higher the cost with some trades not being offered this type of insurance.
An add-on benefit of these PHI policies is that the premiums payable are tax-deductible, albeit the income from such a policy if invoked is treated as taxable income in the corollary. For those who are terminally ill, critical illness cover is generally of limited benefit, having sufficient life cover in place and your house in order vis a vis qualifying for widow and widowers pension would to my mind be of more relevance.
In summary, life can throw up nasty and stressful surprises. Some will fly on a wing and prayer and hope to get through unscathed, for others it is worthwhile examining whether it is worthwhile subscribing for a financial product be it life cover, or illness cover which would help in the event of unfortunate circumstances.
Having a clear understanding of what you are signing up for will help you make an informed decision. Each person should obtain relevant financial advice specific to their own circumstances.