Prudence is a word seldom used in financial circles. John Lennon wrote a song about a girl and entitled it Dear Prudence and when it comes to ensuring that if you die your loans are paid off, obtaining that form of prudence can be dear.
John Lowe, the Money Doctor, highlights that all lenders in Ireland are obliged to ensure their customers, if under 50 years of age, have mortgage protection when borrowing against their home. It is also prudent to consider life and health cover for all other types of loans and special circumstances.
In some cases, life cover on home loans can be waived. If the applicants are aged over 50, they could be penalised through more expensive premiums because of health issues.
Customers have the choice of signing a Waiver form that basically states that if they die, if a joint policy, the surviving partner or next of kin has to continue or organise the repayment or renegotiation of the loan at that point.
Life insurance is still cheap – there are three kinds of life cover/insurance:
1. Decreasing life cover (or mortgage protection) – as the name implies, your mortgage balance is covered and as it decreases through capital being repaid, so does the life cover.
This is the cheapest of the types of life cover available. Remember also that some insurance companies will match the best rate available and give a further discount up to 10%. Only intermediaries can advise on this.
2. Level term assurance/convertible level term assurance – this means whatever the original sum borrowed is covered for the entire term irrespective of what the balance is when the life assured dies. This is, therefore, more expensive than decreasing cover.
With the convertible term insurance, you have the right to extend the policy without having to do a medical on maturity. This type of insurance should be taken out separate to mortgage protection if you have dependents and only until those dependents are no longer dependent.
The formula for cover for your children is – 10 times joint net annual income less any Death In Service benefits (DIS) until completion of your youngest child’s 3rd level education.
3. Whole of life cover – this covers you until you die for the whole of your life. This is the most expensive but the younger you start paying into this kind of policy, the cheaper the premiums. Section 72 policies are whole of life policies generally taken out by parents to cover the tax liability of their children’s inheritance.
You can of course also insure against serious illness (or critical illness) – where you receive a lump sum if you contract a serious illness – and income protection covering employment incapacitation.
With the latter, this is where if you cannot work for whatever reason, you can receive up to 75% of your monthly income after a deferred period ( usually 26 weeks ) right up to when your pension kicks in or you return to work, whichever is the sooner.
This is called Permanent Health Insurance (PHI) and it is the ONLY type of assurance outside of pension linked life cover, whereby the premiums paid attract tax relief at your marginal rate.
To get the best deals and professional advice, talk to an independent financial adviser. Of course, you can also go directly to the insurance companies.