As a Financial Advisor I continue to come across clients who have ONE life assurance policy which is set up to meet two objectives; To repay their mortgage if either should die and to pay a lump sum to the surviving spouse / partner to safeguard the family’s financial future.
….on the face of it this approach seems ‘fine’ as the mortgage and family are covered but the reality is it is much BETTER to have TWO separate life assurance policies with separate objectives.
Policy A being a simple no frills mortgage protection policy which pays the Bank and Policy B being a convertible term plan which is earmarked for the benefit of spouse / partner and dependants….
This situation once again came to the fore when I was approached by a young couple (both 37 next birthday and non-smokers) with 3 children ages 12, 11 and 9. They have ONE life assurance policy which provides for payment of € 600,000 if either should die within 25 years (matching the mortgage term). The cover remains level and the guaranteed monthly premium is € 99.57.
….They have a mortgage balance of € 325,000 so if either should die their policy will be sufficient repay the mortgage in full and there will be a further cash payment of € 275,000 to the surviving spouse…..
They have indicated that if either spouse died the household would suffer a net income loss of € 3,000 per month (when offsetting the mortgage and factoring in State Benefits). Therefore the lump sum payment of € 275,000 will support the financial needs of the family for approx. 7.5 years.
….all in all not too bad – the family will have no mortgage worries and some cash in the bank…
….However it would make MUCH MORE SENSE to have two policies….
Policy A – being a mortgage protection policy which has initial life cover equal to the mortgage and the cover then reduces in line with the outstanding mortgage balance. If either should die within the mortgage term the mortgage is repaid. The cost of this cover would be € 36.27.
Policy B – being a separate plan with level life cover and the proceeds are paid directly to the surviving spouse / partner – with NO REQUIREMENT to chase down the bank for the remainder of the policy (which would otherwise be the case if they had one policy).
….if we note that they are currently paying € 99.57 (with their existing plan) and they set up a new no frills mortgage protection policy for € 36.27 this would leave them with a balance of € 63.30 to purchase a second policy which would provide for a lump sum to be paid to the surviving spouse / partner….
….A monthly premium payment of € 63.57 would secure Life Cover (on each life) of € 475,000 based on a plan term of 15 years (with an option to renew without evidence of continued good health being required)….
….Remember with the youngest child being 9 years of age today a plan term of 15 years is sufficient as the next 10 / 15 years are the ‘critical years’ – by that I mean the largest financial impact of the premature death of a parent will be most keenly felt in the following 10 / 15 years…
….Hence FOR THE SAME MONTHLY COST the provision of two policies ensures the Bank gets paid and the Family secure a larger cash payment of € 475,000 – as against € 275,000.
The additional payment of € 200,000 on this latter arrangement would be very welcome indeed and the total payment of € 475,000 would meet the family’s needs (based on a requirement of € 3,000 per month) for just over 13 years….
When seeking to protect the need to repay the BANK and to safeguard your family be sure to look at two separate policies to ensure you optimise the outcome of your monthly spend.
….Don’t hesitate to contact Full Circle Financial Services Limited if you might wish to have us review your existing life cover needs. Additionally some of the Life assurance providers are currently offering very competitive premiums rates so it never hurts to review your existing life assurance plans to see if you can secure some savings by switching away from your current provider to a more competitive priced plan….
All premiums quoted are based on the clients securing standard acceptance terms at outset. A Mortgage Protection policy is a life assurance plan which provides reducing life cover in line with a mortgage repayment schedule (6% p.a.) and is designed to repay the mortgage balance on either of the lives premature deaths. A Convertible Term Plan is a life assurance plan that provides for level life cover for the full plan term with an option to renew the cover (for the same or lesser amount) at the end of the term without then being obliged to demonstrate evidence of continued good health at the time of converting. Both policies pay out on death only (within the plan term).
Full Circle Financial Services Limited – www.fcfinancial.ie