Making Cents: 'Even more questions and answers' - Liam Croke

Liam Croke

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Liam Croke

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news@limerickleader.ie

Making Cents: 'Even more questions and answers' - Liam Croke

AS promised, I’m continuing this week with answering three more readers’ questions.

Question

Hi Liam, we are a couple in our 30’s with twins aged 1. We took out a mortgage a couple of years ago and arranged the life cover through the bank we took the mortgage from. We had no clue about being able to arrange it with anyone else and it was just easy to arrange it with them anyway as it was stressful enough buying a house. The cost of the policy is €120 per month which seems high compared to what other friends of ours are paying. How do we check to see if we can do better? As you can imagine, with two young kids and the costs associated with them, any savings help.

Answer

The above was just part of a much longer email they sent me where they shared a copy of their life policy, how much they borrowed, the term of the mortgage etc. and my reply to them was as follows:

You are indeed paying much more than you need to, about 50% more.

When I looked at all the providers in the marketplace and more importantly when I looked at what the cost of having the right policy in place, I discovered the cost you should be paying each month is €62.

You have the wrong type of policy which is why you are paying €120 per month. I suspect the motivation behind the bank arranging that type of policy for you is, the more you pay each month, the higher the commission they get paid and they do get paid commission, make no mistake about it.

And it’s a pity, they didn’t give you more options to choose from, rather than just putting one in front of you and rushing that through.

Okay, we can set up a new policy for you if you want, and we’re not reducing the level of life or serious illness cover whatsoever. We’re just changing the type of policy that’s all.

And here’s what you can do with that €58 saving each month.

You can put it aside for your twins and in 17 years’ time, you’ll have about €20,590 which will cover nearly 7 years’ worth of registration fees if they both decided to go to college.

If you applied it to your mortgage as an overpayment it will reduce the term by 2 years 9 months, saving you €10,626 in interest payments.

And if applied to your pension, it would add €91,013 to your fund at retirement.

Or you can just use the €58 for nothing, and both of you can catch a break from the twins once a month and go out for a meal or a few drinks.

So, there’s many things you can do with the savings, which amount to €20,184 over the term of your mortgage which is significant.

And I come across young couples like you all the time, where I feel their naivety and lack of knowledge is being taken advantage of by banks, who upsell products to them that whilst satisfy the requirements for getting a mortgage issued, don’t factor in the cash flow implications for them.

Starting off and buying a house is a big deal and managing cash is so important, and everyone, banks included, need to be cognisant of this and be mindful of what those savings mean to people and how they can be applied to other areas of their financial lives and their non-financial lives as well.

Question

Liam, I’m leaving my current employer early in the New Year, but I’ve been offered the opportunity to continue with the death in service policy I had with them. I just have, to cover the cost myself. I’m 46, female and a non-smoker and the level of cover I can continue with is €450,000 at a cost of €67.27 per month. My questions are, is it a good idea to continue with the cover and is the premium good?

Answer

The big advantage to converting this death in service benefit to a personal policy is being able to do so without the need for medical underwriting. You are automatically accepted by the insurer regardless of any underlying medical condition.

So, exercising this option is excellent and certainly one I would be taking advantage of.

If you did, the policy must be arranged in your name, so you can’t assign the policy to your partner/spouse until the policy is active. And not a big deal if you never assigned it, they’ll still get the money if you were to die, it just takes a whole lot longer than if they were the policy owner.

Other things you have to be aware of are: the term of the policy can’t be longer than whatever your normal retirement age was with the company you’re leaving, so the term of this policy if you exercise the conversion option will be for 19 years, and also typically the life cover continuation application form has to be completed within 30 days’ of leaving service, so don’t miss this deadline.

And finally, I checked all the providers in the market and the premium you’ve been quoted is very good. I can find a better premium but it’s only €0.64 cent per month cheaper so long story short, exercise the option and the premium being charged is excellent.

Question

Liam, I’ve just finished paying off my mortgage. The monthly repayments were €1,000 but now that I don’t have to make that monthly payment anymore, what should I do with this €1,000? How do I make best use of it? I’m 53 and plan on working until I’m 65 and I’ve two children aged 13 and 12 who may go to college so I’m thinking of setting aside all of this money for them. Being able to help them is very important to me and my wife. We’ve a college fund of €30,000 in place already but not sure if it’s enough. Your advice would be welcome.

Answer

When I received your email, I thought what was the best strategy to optimise that €1,000 you now have at your disposal?

And I think I would do two things with it.

If your kids go to college, I think it’s reasonable to suggest that they’ll end up costing you about €70,000.

You have accumulated €30,000 which means you’re €40,000 short. In order to, make up that deficit you need to save €620 each month, into an account earning 3% for the next five years. If you do, you’ll hit the target you need.

So, that’s the first thing I’d do with those surplus monies.

You still have €380 left over and my second suggestion would be to apply this amount to your pension fund.

When you factor in tax relief, you are turning €380 into €633. Which means €633 is being applied to your account each month but only €380 is being taken from your salary.

If you did this, when you reach 65, you’d have increased your pension fund by c. €125,070.

And the amount you’d have personally contributed would have been €54,720 with the extra amount coming by way of tax relief and returns on your fund each year.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie