informed decisions blog

Blog #52- Have You Made ‘The Empty Promise’…….Havvvve Youuu?!

30th October 2017

Paddy Delaney

This week we will take a look at the empty promise that we hear so many people make to themselves and to their loved-ones! This empty promise is akin to playing Russian Roulette with your loved-ones’ financial well-being…..if you are a selfish gambler then perhaps its OK, for the rest of us it simply isn’t, no matter what hat we’re wearing!

What in the blue-blazes are we talking about? We are talking about the gamble we hear so often, whereby a couple are taking out a new mortgage, and when faced with whether to put in place just the Mortgage Protection, or to comprehensively cover themselves by taking Mortgage Protection as well as an element of Personal Life Cover. Many many people make the empty promise when they say “We’ll do the Mortgage Protection now, and sure we’ll do some sort of personal Life Cover once things settle down”…..that is a “I’m happy to gamble with my families financial well-being” if ever we heard one!!

In this episode we are going to initially look at the basics of the two types of cover….just so we’re all on the same hymn sheet! In a few minutes we’ll then dissect the merit of the advice to pay for both Mortgage Protection & Life Cover. We’ll uncover if having both is as useless as a chocolate fireguard, or if it is actually a prudent and necessary approach to take when it comes to protecting your yourself and your family, and indeed your financial plans here in Ireland.

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As we have discussed in many past episodes what most people expect when they go to get some financial advice is not so much advice as to be sold a series of products……and the top of that list (even if it is the right thing to do!) is Life Cover, Mortgage Protection and Specified Illness Cover….these products pay the biggest commissions, they also happen to be critical bedrock of a financial plan, so they are top of the list in any financial advice or financial planning conversation…..most of us have probably been there! Indeed if you have taken out a mortgage you have most likely been advised to take out life cover to cover the mortgage but also life cover to cover you personally….lets look at the merit of this train of thought folks.

What Exactly Is Mortgage Protection?

Mortgage Protection is not to be confused with Mortgage Repayment Protection! The former product is designed to pay out a lump sum which is sufficient to clear the total remaining balance of a mortgage loan if you die. If you borrow €250k over 30 years then it is safe to assume that your mortgage balance will reduce over those 30 years, slowly but it will reduce! In the initial years the majority of what you are repaying goes toward paying the interest on the loan (assuming rate of 3.2% in above example approx €700 of each months’ repayment will be interest, the remainder, €350 will go towards the ‘capital’ (actually repaying the loan!!).

As you can therefore imagine the mortgage balance does not reduce in a ‘straight-line’ basis, it is more of a curved down-ward trajectory! Fairly flat in the initial years as your actual balance is not reducing, and then will reduce fairly lively once you get over the initial 1/3 or so and you get to actually repay a decent chunk of capital each month.

Mortgage protection is designed to reduce broadly in line with the mortgage in this way. To make that happen they the mortgage protection policy assumes an interest rate on the mortgage that it is related to…some assume 4%, others can assume up to near 10%. The higher the interest rate the policy assumes, the slower the amount of cover you have will reduce…..but it will still end up at zero in 30 years, in this case. That’s a difficult one to explain in person, so I hope we’ve made some sort of sense there!?

Do I Have To Have Mortgage Protection??

If you are taking out a new mortgage then most lenders/banks will want to see a Mortgage Protection policy in place before they hand over the ‘doe’! It gives them the peace of mind knowing that if you or your partner die the mortgage will be cleared by the policy, and they won’t be left chasing the surviving party for the money every month. If a lender is insisting it is in place then you can take it that their motive is to protect themselves, in the first instance at least!

In most circumstances the lender is soooo motivated that they will insist the policy is set up in such a way that any potential future pay-out is to be paid directly to them! This is what they mean when they say ‘we need to assign this policy to the bank’! And this makes total sense in fairness, as that is the reason you are taking out, and hence paying for this benefit, you want that mortgage cleared in the event of a death right?!

If you have an existing mortgage then you most likely have a mortgage protection policy in place that would pay out a lump sum (and then clear your mortgage) if you or your partner died. There are instances whereby the mortgage policy may have been cancelled for one reason or another. If you or your partner die then you will still have to pay the mortgage payment every month, for the remaining term of the mortgage…….might not be a pretty picture!?

What Exactly Is Personal Life Cover?

While it’s not easy we don’t like writing the same thing twice, so by all means check out details and ideas about what life cover is and what the different types are, and indeed how much should we should have.

Ultimately the core difference between Personal Life Cover and Mortgage Protection is that the former is designed to pay a lump sum to your survivor’s bank account to replace your income, while the other is designed to pay a lump sum to your lenders’ bank account to pay off the mortgage in full….simples yo!!

The Two Outcomes of ‘The Empty Promise’!

We will go as far as to say, based on the above paragraph that if you have a mortgage then you need Mortgage Protection. Do you also need Personal Life Cover? Chances are that if you’ve met an advisor they are telling you that you should. Maybe you’re not convinced, maybe you are or have made the empty promise!? Let’s look at both sides of the argument…let’s assume you are taking out a new mortgage, you have a young child, and are trying to get your head’s around all that is involved with taking on a mortgage etc etc…..

“We’ll Just Go With The Mortgage Protection Now, and Sure You We’ll Get The Personal Cover In A Few Years Once Things Settle Down”….Lets see what happens if either of you die in 3 years, before you follow-up on that empty promise!

-The mortgage will be cleared (good)

-You will have saved on the cost of the personal Life Cover policy, because you didn’t put it into place… for a couple in 30s, non smokers, for say 300k, over 3 years you’ve saved €1,700 or so. (good)

-Your income will be gone, your partner may not want to go to work, rather be at home with your child….but they won’t be able to afford to give up work, all they’ll have (provided you’re married) is €1,000 per month from the Widow(ers) Pension…..even with no mortgage that’s not a lot of money to cover food/ car/ bills/ education/ clothing/ activities/ etc/ etc! (not good!!)

-Your partner will be cursing you, rarely visiting the grave because you were such a skinflint and wouldn’t pay for a bit of Personal Life Cover…Your grave will become over-grown, littered and will pale in insignificance to the ones beside you where the survivors got a juicy life cover cheque AND had their mortgage cleared!! (not good!!)

-If money is as tight as it sounds it will be then there is unlikely to be an education fund to send the child to whatever college you would like them to attend. But Education is Free?? No it is not….check this out! (not good!!)

-Your partner may decide that in order to free up some cash he/she will sell the house (which has no mortgage now of course) and buy a smaller place, or a place in a less desirable location…..all which will potentially have an impact on their happiness or well-being (not good!)

-You may well think that this sounds overly dramatic, however these are real events which we have seen (apart from the grave thing perhaps!!).

Let us now imagine that you did not make ‘The Empty Promise”…that rather than sticking it on the long finger you decided to address the Personal Life Cover situation straight-away

-The policy is as cheap now as you will ever get it, if you apply in a few years you will be paying a premium based on your age then, not on your age now…’s cheapest today! (good)

-It will cost you money to have this cover (not good!!)

-You may not be able to get the cover in a few years, if you suffer from particular health issues it will be ‘get-able’ but will be a lot dearer…merit to get it now (good)

-If you die the mortgage will be cleared by the Mortgage Protection policy, but there will also be a €300,000 cheque paid to your surviving partner. (very good!!)

-You are dead (not good!!)

-Your surviving partner can now afford to give up work, remain in the family home, educate the child, live a dignified and full life with holidays and wonderful experiences (priceless!!)

Take what you will from the two scenarios……….invite your partner to read this, have that conversation among yourselves….you don’t need an advisor to tell you that you might need both, with the info above you’ll be able to decide for yourselves!! By all means use a competent advisor or planner to help you structure your plans in the most tax and cost efficient manner….but you make the decision as to whether to make ‘The Empty Promise’ or not.

Likewise if you now realise that you have made ‘The Empty Promise’ in the past, and that you still have not followed-up on it then we hope that this information gives you a boot up the rear, and that you’ll add it to your ‘to do list’ right now……….and make that promise a reality.

In summary; what does nobody want to pay for, nobody wants to use, but everybody knows they need…..Personal Life Cover!

Thanks so much for reading…..please share with friends & family to help them help themselves….they might even thank you for it!

Paddy Delaney

QFA | RPA | APA | Qualified Coach

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