Mortgage Protection

Prior to issuing your mortgage, your bank will insist on you having a life insurance policy that is linked to your loan, so that in the event of your death your loan will be cleared. This type of life insurance policy is referred to as Mortgage Protection.

Mortgage Protection is a type of life insurance where the cover amount gradually decreases over the policy term. The initial sum insured is usually the same as your loan, and the term normally matches your mortgage term.

Mortgage Protection can be set up on a single or dual life basis.

This type of policy is suitable for covering a reducing financial need, such as a mortgage or other loan where the outstanding amount is consistently decreasing.

 

Example:
John is drawing down on a mortgage of €300,000, set up over a 25 year term. His lender has asked him to set up a life insurance policy to cover the outstanding balance of his loan in the event of his death. John takes out a Mortgage Protection policy that offers initial life cover of €300,000, also over a 25 year term.

In 10 years time, John dies. The balance on his mortgage is €200,000. The cover amount on his Mortgage Protection is now also €200,000. The insurance company pay the lump sum of €200,000 to his lender, to be used against his outstanding loan. The mortgage is therefore cleared.

 

Tips:

  • You can review/change your mortgage protection at any time.
  • Check to see if your life insurance is “assigned” to a lender. This means that they will have first call on any claim.
  • You can add Serious Illness cover to your Mortgage Protection so that a lump sum is available in the event of diagnosis of a critical illness*.

*As specified in the policy conditions.

 

Level Term / Family Financial Protection

Level Term is a type of life insurance where the cover amount and the premium remain fixed for the duration of the policy.

It is set up on a long-term basis, usually 20-30 years.

This can be set up on a single or a dual life basis.

This type of policy is most suited to providing financial protection for your family and to cover funeral expenses.

 

A number of additional benefits can be added to this type of life insurance:

  • Serious Illness Cover
    This provides a lump sum if you are diagnosed with a critical illness (as specified in the policy conditions).
  • Hospital Cash
    This provides funds if you are admitted to hospital for an extended period, (usually exceeding 72 hours)
  • Surgical Cash
    This will pay a lump sum if you have to undergo surgery.

 

Example:

Mary and Mark were married and set up a life insurance policy for €250,000 each with standalone Serious Illness cover of €100,000 each.

Unfortunately, Mary suffered a heart attack and once this had been confirmed by a doctor, €100,000 was paid to her. Mary was no longer able to work so this money went towards paying the mortgage, childcare costs and increased medical expenses (including fuel costs, hospital car parking fees, food on days she had to travel to a specialist etc.).

A few months later, Mary sadly died and €250,000 was paid to Mark.

Mark’s life and illness cover is unaffected and he, or his family, can still claim if something happened him before the end of the policy term.

Mark used this money to cover the funeral costs, sets some aside for a college fund for their two children, and takes a year off work while he is dealing with this very difficult time. He does not have to worry about where the money will come from to pay the electricity bill, buy the weekly groceries, or pay for increased childcare now that he is a single parent.

Without this insurance policy, Mark’s life, and his children’s would look very different.

 

Tips:

  • Check if the Illness cover on your policy is standalone or accelerated.
  • Make sure your cover amount is high enough to provide a replacement income for your family on your death.
  • Check your life insurance policy to see if it is level/fixed or decreasing.

 

Whole of Life Insurance

Whole of Life insurance is a type of life insurance where there is no defined term at set up, the policy continues until you die.

The premium and the cover amount remain fixed for the duration of the policy.

This can be set up on a single, joint or a dual life basis.

This type of policy is most suited to providing financial protection for your family and to cover funeral expenses.

This policy can also be used to cover expected inheritance tax liability for your family on your death. The plan can be set up in trust under Section 72, which means that the proceeds of the policy are exempt from inheritance tax, once they are used to pay the inheritance tax liability.

 

Example:

Anna has assets worth €1,000,000 and, on her death, will be leaving everything to her only child Ben. Ben has already inherited €750,000 when his father died.

Ben has therefore already exceeded the inheritance tax threshold under category A – parent to child, which is €335,000.
When Anna dies, 33% of his €1,000,000 inheritance will need to be paid to Revenue within a couple of months of his mother’s death. This amounts to €330,000.

Anna wishes to make €330,000 available to Ben on her death so that he can pay Revenue his inheritance tax liability. She sets up a life insurance policy under Section 72, insuring herself for €330,000.

When she dies, this amount of €330,000 will be paid to Ben tax-free, for onward transmission to Revenue.