MoneyTimes, June 25, 2013
Posted by Jill Kerby on June 25 2013 @ 12:00
PROTECT YOUR WEALTH: BUY THE RIGHT LIFE INSURANCE
The death occurred last week of one of my favourite actors, James Gandolfini, whose role as Tony Soprano, the New Jersey mobster was an extraordinary performance. Tragically, he left behind a young wife, a nine month old baby daughter and a son from a previous marriage.
Gandolfini had professional agents and advisers keeping his finances in order, but his premature death at 51 is not unusual: my own brother died at that age leaving a wife and two (older) children; my father at 50. Neither left sufficient life insurance to adequately protect their dependents, so I know from experience how important it is to have life insurance, especially if you still have young children.
However, in my travels with the ICA Mother & Daughter Personal Finance seminars around the country I’ve discovered that one of the worst forms of life cover, so-called low cost whole of life assurance, continues to be an on-going financial problem (and loss) for the holders of these contracts and is still being sold, often to new home buyers by their bank.
Whole of life assurance, once sold by armies of ‘industrial’ branch insurance salesmen, differs in a number of way from straightforward, good value term or convertible term insurance, the latter of which pays a benefit upon death for an agreed period of years at a fixed price.
First, the premium is often set intentionally low at the outset to convince the buyer that it is better value than term cover and to make it easier for the salesman – not a financial adviser in the true sense since the best of them DO NOT sell this insurance – to make the sale and collect huge, ongoing commissions.
This assurance – nearly always a “unit-linked” version – involves part of premium paying for the life insurance amount and the rest into the unit linked investment fund. The problem (aside from coupling the two to maximize costs, charges and commission payments) is that the investment value can and often will be eroded to cover the increasing cost of the life insurance element as you age. Reviews only take place after the first 10 years (and before 2001, seldom, if ever.)
The investment value also ‘bombs out’ and the policy can be cancelled by the insurer if the owners do not agree to significantly increase their monthly payments.
What I’ve discovered on my travels is that many older people in their 50s and 60s, most of whom did not understand what they were buying 20 and even 30 years ago, (they thought they were buying genuine life ‘insurance’ not a high cost investment policy) can no longer afford the ever increasing whole of life premium demands, but that they have no other life cover and still have dependents.
“People hang onto to these very poor value policies because they have paid so much money into them and are now reluctant to let them go, especially if there is little or no investment value left, and crystalise that loss,” John Geraghty of LABrokers.ie, a discount, on-line broker and adviser told me last week.
“Also, the cost of insurance now is very expensive for them because they are older. But a review may show that they don’t still need this cover; that their other assets [at death] will compensate for the loss of this cover.”
In these difficult times, many people say that even life insurance is too expensive. However, term policies have become cheaper in the last five years, said Geraghty and at age 30, a 20 year fixed term, fixed premium insurance policy worth €200,000 will cost a non-smoker in good health just €12.45 a month and if taken out at 45, €31.85. Yet a woman who is now 65 told me at one of my seminars that she and her husband will pay over €75 a month (albeit, a joint policy) for the original €20,000 of whole of life investment linked assurance they bought back in the late 70s; it has practically no investment value.
According to Geraghty, these appalling products are still being sold, often as mortgage protection policies to gullible and nervous homebuyers who are pressured by their lender to accept the whole of life version rather than the better value cheaper term, decreasing term or even convertible term policies (that or a small premium can renew at the maturity date without needing to provide up-to-date medical evidence.)
“You need life insurance if you have dependents or mortgage protection insurance if you have a homeloan. No, you are not obliged to buy it from your bank which wants to maximize its commission and profits,” said Geraghty.
So before you make what could be a colossally expensive insurance mistake, speak to a reliable, qualified, impartial, ideally fee-based broker/adviser about what is the genuinely the lowest cost and appropriate product for you.
Tell them Tony Soprano sent you. [Meanwhile, may James Gandolfini, just 51, Rest in Peace.]