Category: Mortgage Protection

To quote the Ronseal ad, ‘It does what it says on the tin’ – mortgage protection is not too dissimilar.

Mortgage protection is the most cost effective form of life assurance and is used most widely to protect both the borrower and the bank against the risk of the borrower dying within the term of the mortgage.

It is cost effective as the amount of life cover that is paid out is matched to the amount outstanding on the mortgage always. So as the mortgage decreases, so does the life cover that is attached.

A mortgage provider will almost always ask that you have a policy like this to protect themselves before they will agree to allow you to draw down your mortgage. They will insist that they are the first ones to receive the benefit in the event of your death. They can offer to help with this, but you are entitled to shop around and obtain the best policy in the market. There is no guarantee that the bank is doing this for you, especially when they only deal with one life insurance company!

WHY “BEAT THE BANK” INSTEAD OF MY BANK?

A bank is a tied agent to just one of the protection providers in Ireland. I should know because I worked in one for four years! There is no assurance that you are getting the best price or the best product because the bank doesn’t have access to all the providers in the market. We have access to all top 5 mortgage protection providers in the Irish market – Aviva, Irish Life, New Ireland, Royal London & Zurich – providing you with the cheapest and best out there in the Irish market.

WHAT HAPPENS IF I DIE?

Taking the unpalatable one first, namely getting caught by the ‘Grim Reaper’ – in this case your policy is triggered and the life company pays the amount of cover on the policy to you/your bank and your mortgage loan is cleared. This ensures that your partner/spouse and family do not have the added financial burden of trying to cope with paying off a sizeable loan with one the main funders of these repayments, having departed the stage.

Your need to knows…

• It can be done in single names or joint names. In the latter case the claim is always paid on the first death.

 

• It needs to be legally assigned to the bank which is very straightforward and should only take a couple of days although banks typically will say it takes longer if they are not providing the mortgage protection policy themselves. We can provide you with the deed of assignment

 

• You can switch your cover to another provider at any stage of the loan term. We do this regularly as it saves clients a lot of money as typically they have been sold an expensive policy by their bank in the first place! Note: it is crucial never to cancel your existing policy until your new policy is ready to go live.

 

• There is no value in the policy. if you clear your mortgage earlier than the loan term make sure and cancel your mortgage protection policy as it won’t have any value at maturity i.e. when original loan term it was linked to, expires.

 

• Children’s cover comes as a benefit with most plans at no extra cost although hopefully it is never availed of. For example, Royal London’s children’s cover on Mortgage Protection policies is €5,000 and covers the life assured(s) children from the age of 3 months up to age 18 or 21 if in full time education.

Marriage is not everyone’s cup of tea but it can certainly be a very tax-effective route to go given the way Revenue look on cohabiting couples. In terms of what defines cohabiting … to quote the Citizens Information website..’ If you are living with another adult and in an intimate and committed relationship with them, but you are not married or in a civil partnership, then you are cohabiting.’

Unfortunately, cohabiting couples are treated very differently to married couples in terms not only of their legal rights but also in terms of taxation. This is particularly relevant on the mortgage protection side as Revenue assess cohabiting couples as individuals or “strangers”. This has important ramifications when it comes to the way mortgage protection cover is set up for cohabiting couples.

With over 152,000 cohabitating couples in Ireland in the last Census it is a sizable audience so it is vital that where such couples go down the property acquisition route and take out a mortgage – they do it in the right way. If they don’t set up their mortgage protection cover correctly a hefty inheritance tax bill looms large should one of the partners sadly pass away.

Worst Case Scenario
Let’s look at the worst case scenario first where we assume the cohabiting couple set up their mortgage protection cover as they think is appropriate.

Ben and Clodagh see a new build in a leafy estate that they fall in love it and is valued at €300,000. They have the €30,000 deposit saved up over a number of years and lockdowns and take out a mortgage of €270,000 for the balance to buy it. They also take out Dual Life Mortgage Protection cover for the loan amount over 25 years. In the first year, poor Ben passes away and the mortgage protection cover kicks in to clear the mortgage loan. If they were married that would be the end of it tax wise as Clodagh would simply inherit the house with no tax liability.

However, as they were cohabiting Revenue now issue Clodagh with a tax demand for €44,137*

*As Clodagh owned 50% of the property she now inherits Ben’s 50% worth €150,000. With inheritance tax at 33% , she must pay this on any amount she inherits after her threshold allowance of €16,250.

€150,000 – €16,250 = €133,750 *33% = €44,137

Note: It may be possible to avoid Inheritance tax if one qualifies for the Dwelling House Exemption – always get independent tax advice.

Best Case Scenario
Here, Clodagh and Ben got appropriate advice on the mortgage protection side and the policy was structured to reduce or negate any inheritance tax liability that might arise should one of them pass away.

Going back to our earlier example, this time Clodagh and Ben each individually take out mortgage protection cover on each other’s life for the full mortgage loan amount i.e. €270,000. It is vital that the premiums for each policy are paid from each individual’s bank account and not any joint account. Thus, they have two single life, life of another mortgage protection policies so affordability is a key issue.

If Ben dies in Year 1, Clodagh’s policy (i.e. it was Life of Another so Ben was the name on it) is triggered and the proceeds of her €270,000 mortgage protection policy are used to clear the loan on the house. Clodagh now has inherited her own half of the house so she is exempt from having to pay inheritance tax on it but she has to pay it on the mortgage-free part ( i.e. the late Ben’s) that she inherited.

€300,000-€270,000 = €30,000 divided by 50% = €15,000 inheritance tax due.

However, taking her individual exemption threshold of €16,250 off this amount leaves her now with no inheritance tax liability!!!

This is a perfect example as to why getting financial planning advice from a CERTIFIED FINANCIAL PLANNER™  is crucial as you can see there is no inheritance tax liability compared to our previous ‘worst case scenario’.

The key here is that by arranging the mortgage protection cover in this way and making sure Ben and Clodagh paid the premiums from their own bank accounts; this has ensured no inheritance tax liability for Clodagh as she is the beneficiary who paid the premiums on the policy that paid out.

In summary, it is very important for cohabiting couples taking out mortgage protection insurance to set up their policy or policies in the correct way as in the sad event of a death, the tax burden can be onerous at a very vulnerable time. Please feel free to reach out of you want clarification on your own situation whether you’re thinking of buying, Sale Agreed or have already purchased and feel this is a situation that you find yourself in. I’m always here to empower clients to make informed decisions for themselves and their families.