There are so many kinds of insurance, it can be confusing when it comes to buying a policy to protect mortgage repayments, payments owed, your income or life cover.
As more people become vulnerable to unemployment, the risk of being unable to meet insurance payments has become very real, and so we should question what insurance cover we need and if we have it, whether it is right for us.
Tina Leonard has an overview of the different types of cover available and when they might be suitable for you.
As with all financial products they can be confusing and shrouded in difficult to understand language. In addition, sellers give different (marketing) names to their various policies, which may add to confusion as to what you are looking for.
Life insurance pays money to a person you name i.e. your spouse or dependants, if you die.
“Term life insurance” is the simplest and one of the cheapest forms of life insurance. A term life policy gives your dependants a lump sum if you die during the term of the policy.
For example, you might take out a policy on your own life for €100,000 over 10 years. This means if you die within 10 years, the policy pays out €100,000 to your dependants, once someone can give proof of your death. If you don't die within the term of the policy, no benefit is paid out and the policy ends.
You may not need it if:
You may not need life insurance, or you may need less cover if:
No-one depends on your income or work
You have death-in-service benefits through your job or pension plan
You have enough money for your dependants to live on if you died
Your dependants would be able to live on any social welfare benefits they would get if you died
You have investments or property that could provide an income or be sold
Your family is grown up and financially independent
- Your partner is earning enough money to live on
Another type of life insurance is mortgage protection insurance. It is designed to pay off your mortgage if you die during the term. It runs for the same length of time as your mortgage. So, if you take out a mortgage over 20 years, your mortgage protection insurance must also be in place for 20 years.
Generally, mortgage protection is designed to pay off your mortgage if you die, not to provide a cash sum to your dependants (it’s really for the lender’s benefit rather than yours). So, you may want a separate life insurance to provide for a cash lump sum if you have a dependant family, bearing in mind that anything left over after paying off the mortgage goes to your estate.
By law, your mortgage lender must make sure that you have this cover before taking out a mortgage. You can use an existing life insurance as long as it is not in place to cover another loan or mortgage, it provides enough cover and you ‘assign’ it to the lender. You may also be able to take out a mortgage without this insurance is you are buying an investment property or you are over 50.
Getting the best deal
You do not have to take the mortgage protection policy your lender offers you and you are free to shop around for a suitable policy. Your lender cannot refuse you a mortgage just because you don't accept the policy they recommend.
However, be aware that if you buy the policy through your lender, you are insured under the lender’s group policy. So if you switch mortgages your insurance will be cancelled and the older you are the more a new premium will cost.
Take into account changes in your circumstances (marriage / children) and in your lifestyle including dangerous hobbies, occupations and smoking. In particular quitting smoking can make a big difference to your premium, once you have quit for one year.
Bear in mind that if you are in financial difficulties and have made any changes to your mortgage policy you have to advise your insurer as your insurance policy will need to be reviewed.
How to save money on policies
Price differences found in National Consumer Agency price survey (March 2012):
A difference of €6,392 between highest and lowest on mortgage protection policies for a 27 year old couple, both smokers for €290,000 over 35 years.
For term life insurance over a15-year term, with cover of €160,000, a 49-year old female could save on average €6,003 by quitting smoking, while a 49-year old male could save on average €8,927 by quitting smoking.
This type of insurance does not cover your repayments if you cannot work due to redundancy, sickness or disability. For this type of cover, you will need to consider other types of insurance such as, serious illness, income protection or payment protection.
Serious Illness Cover
Serious illness insurance pays you a tax-free lump sum if you are diagnosed with one of the specific illnesses or disabilities that your policy covers. It is also sometimes called 'critical illness cover'. It is sold as an insurance policy on its own but is more often added on to your life or mortgage protection insurance.
It can cover specified illness benefit and also things like accidents, broken bones and hospital cash. If you are worried about meeting payments due to illness or an accident and don’t have any income protection, this may be a consideration for you.
It is more expensive than life / mortgage protection and if you add it on to your policy is likely to increase the premium by a factor or two or three.
Income Protection Insurance
Income protection insurance pays out a regular cash payment that replaces part of your lost income if you can't work due to a medium to long-term illness or disability.
You may need serious illness cover / income protection if:
You are self-employed and would have no source if income if you couldn't work due to illness or disability
You have little or no sick pay from your employer
You have dependants who rely on your income
You have no other source of income or money
- Benefits you may be entitled to would not be enough to replace your lost income and/or cover your normal expenses. But check what social welfare benefits you may be entitled to first, as you may not need it.
Payment Protection Insurance
Payment protection insurance is insurance that will pay out a sum of money to help you cover your monthly repayments on mortgages, loans or credit cards if you are unable to work for certain reasons covered by your policy, such as death, illness or accident, or you become unemployed through no fault of your own.
What to check if you’re buying
Total cost: Add up monthly premiums to see how much you’d have to pay each year, and think about it like this. A loan of even €10,000 might cost you another couple of thousand euro to protect.
Conditions: What is covered? I.e. are specific illnesses excluded, is redundancy cover included?
Up front payment: If you take this out at the same time as a loan some lenders add the full cost of the insurance onto the original loan. This costs more as you’re also paying interest on the premium.
Wait period: Policies will pay out after a certain number of weeks, so note how much you could cover yourself and choose the length of time; the shorter the wait the higher the premium.
Fixed time periods: Monthly repayments or a percentage of them will be paid for a fixed time period only, so check the time limit.
Compensation re mis-sold Payment Protection Insurance in the UK
People may have heard that in the UK banks lost in court after years of systematically mis-selling Payment Protection Insurance (PPI). They have had to put a staggering £9 billion aside to make pay outs to customers, and customers are now applying for refunds – several thousand pounds worth in many cases.
However, this is not the case in Ireland. The office of the Financial Services Ombudsman confirmed that to date they have not uncovered any systematic mis-selling of these products.
Nonetheless, looking at the FSO’s most recent complaint statistics, complaints about payment protection insurance (and also mortgage protection) have increased and remain high, with both categories comprising 18% of all insurance complaints in 2011.
In relation to PPI complaints, of 405 received, just under half, 181, related to mis-selling. Other complaint categories related to customer service, claim handling and repudiation of claim, but over one half of all complaints (67%) were not upheld. (However, bear in mind that the general) average for complaints not upheld is 76%).
If you believe you have a complaint or been mis-sold a product ask yourself the following:
If the insurance was optional, was that made clear to you? Were you advised of any exclusions? If you were paying the premium upfront was this made clear and the fact that you’d be paying interest on it?
For any unresolved complaints about insurance products go to the Financial Services Ombudsman who will deal with each complaint on a case by case basis. They have the authority to order refunds and also award compensation in some cases.