There are fundamentally only three types of life assurance and all policies are one of these or a hybrid.

• Term Assurance and these are some of the variants.

  Level Term Assurance – This cover remains the same for the term of the contract as does the premium. Premiums and benefits will remain level over the term of the contract.

  Convertible Term Assurance – The cover is the same as for level term assurance but at anytime before the end of the term there is an option to continue cover without any further medical evidence being submitted. The terms at which the cover will continue are those applicable to the then age of the insured. This usually means a very substantial increase in premium.

  Mortgage Protection is a form of Decreasing Term Assurance – This cover reduces each year and is generally used in conjunction with a mortgage, to repay the outstanding mortgage balance. Premiums will remain level and the benefit will decrease over the term in line with the outstanding mortgage. This is the least expensive Term Assurance product.

• Whole of Life (WOL)
  As the name implies cover is for the Whole of your life, used typically to fund Inheritance tax. This product is a lot more expensive than Term Assurance.

• Endowment Policy
  This pays if you die but will also pay if you live, is expensive and typically used to fund Mortgage repayment. This typically is the most expensive product.

Dual Life cover means two lives are insured and if one dies the policy pays out, the survivor is still insured and if they then die the policy pays again.

Joint life cover means that there is only one payout, which can be paid on either the first or second death but not both.

Life Assurance policies can be arranged that provide increasing cover with increasing premiums.

Income Protection (Disability Insurance) also referred to as Permanent Health Insurance
Income Protection or Permanent Health Insurance as it is sometimes called provides you with a replacement income if you cannot work as a result of an illness or injury after a certain deferred period of time. It does not cover you if you become unemployed.

Pension
A savings fund to replace your income at retirement, typically between ages 60 to 75. Normal retirement benefits would include a tax free lump sum. There are a broad range of options depending on your employment status, contact us in relation to your specific situation.

Serious Illness Cover
Usually added as a rider or additional benefit on a life policy but can be stand alone cover. Benefit can be paid on an accelerated basis in the event of the life assured being diagnosed with a serious illness covered by the policy. Each insurance company lists the specified illnesses and you should contact us for advice in relation to what suits you best.

Insurance companies may charge in some, none or all of these areas.

• Allocation
  Some older policies i.e. over ten years old would have allocation rates as low as 40% to 60%. However typically a modern life assurance policy or pension would have an allocation rate of 95% to 105%. Effectively anything less than 100% is a charge. Anything above 100% is a bonus.

• Bid / Offer Spread
  An insurance company may (or occasionally may not) have a bid/offer spread which is almost universally 5%. This "spread" is the difference in price between the value you have to pay the insurance company to buy into the fund and the price at which you sell. So for example if the allocation rate (see above) was 100% and the bid/offer spread was 5% then the insurance company's margin is 5%. This bid/offer spread, it should be remembered is a one off charge i.e. it is only charged on money going into the fund and is not levied on the fund every year. Typically if an investor has a large amount of money to invest – say for example €100,000 it may be possible to get an extra allocation from the insurance company for example 103% and this would effectively reduce the cost to circa 2%. We are sometimes in a position to "horse trade" with the insurance company to lower one charge and raise another where it might be better suited to the client.

• Early surrender penalties
  In addition to a 5% bid/ offer spread and an allocation rate an insurance company might have an early surrender penalty, typically 5% in the first year, 4% in the second year etc. until after five years there is no penalty and this would again typically be applied where the allocation rate was in excess of 100%. If this mechanism wasn't in place it would mean that an investor could put €100,000 in on a Monday, get 105% allocation and if there was no bid/offer spread take back a profit of 5% the following day.

• Fund Management charge
  The final area where insurance companies charge is a fund management fee which is usually between about 0.5% of the value of the fund up to 2.5%. If, for example, your investment is in a property fund it will always be on the higher side because it costs a lot more to buy, manage and/or sell property and this has to be factored into the charging. If on the other hand you have your money invested in a consensus fund then its likely to be lower e.g. .65% and in an ordinary managed fund it is likely to be around 1.25%. Some insurance companies have a reputation for charging a little more than the rest and in turn they say they provide a better investment service, which is often the case.

• Policy Fee – Typically €3 – €5 per month

• Pension Board Fee – €9 per annum

Educational Fee Life Insurance policies have been used for educational fees funding for a couple of generations.

The advantages are as follows,

• The fund is there whether the benefactor lives or dies i.e. if they live the policy has acquired a savings value and if they die the policy pays out.
• Investment returns, as was seen from recent SSIA's the equity based products out-performed the ordinary deposit account products, similarly it's possible that an educational fees policy can be invested in an equity based, or property or indeed a very large selection of other funds.
• Tax Positions, in the past there were tax reliefs on premiums, however these were abolished from years ago and now the position is that the fund rolls up without paying tax and on exit the policy holder pays a tax of 23% on gains.

The disadvantages are that,

• An educational fees policy is less flexible than a deposit account in that you’re not in a position to put money in and take it out, this of course could be seen as an advantage also.
• Typically educational fees policies run for a minimum of 10 years.

Pension Legislations provides for two different type of pension. In layman's language I would divide these as follows, company sponsored schemes and personal pensions (typically suitable for self-employed/professionals). The rules governing each type of scheme are different.

However the tax breaks are broadly similar, and I would describe them as follows.

1. Contributions, within certain limits are fully tax deductible and can include relief from PRSI.
2. The fund is typically a tax exempt fund and therefore the assets within the fund accumulate without paying tax which of course means they grow much faster.
3. The third tax break is on retirement with a personal pension the client is allowed to take a quarter of the fund tax free. The balance is paid as a pension, which is taxable or it may be invested in an ARF and proceeds from this will be taxable.

As part of a pension scheme, life assurance and disability cover can be included and the premiums are therefore also tax deductible.

These tax breaks, for personal pensions, are on a 'use them or lose them' basis, that means if you don't take advantage in any given year of the allowances available to you, you lose them. The following is a schedule of the maximum contribution on which tax relief will be allowed.

The above limits include contributions to PRSA's.

The reason the Revenue allow such generous tax treatment of pensions is so that a significant proportion of the population will not be dependent on the State in their old age. This however means that the Revenue do restrict contributions to pensions as per the schedule above.

The above schedule contributions limits also apply to member contributions to an employer sponsored scheme.

Pensions

• Advantages
• You know exactly what income you will get, guaranteed, for life. This income is taxable
• Gains are crystallised with no possibility of future losses
• Tax Free Lump Sum, Final Salary x 1.5 (max)
  or
• 25% of fund (N.B. some investors will not have both options)

• Disadvantages
• Once money is paid into an insurance company for an annuity (income for life) you or your family can never get the money back i.e. you can not change your mind.
• Losses are crystallised with no possibility of recovery.
• The pension stops when you die or when the guaranteed minimum period (typically 5 years) runs out and there is no return of capital.

ARF / AMRF

• Advantages
• You can change your mind and put your funds into a pension.
• You have control over the funds and/or discretion over where they are invested.
• You may then draw as little or as much as you wish. The proceeds are taxable. To qualify you must have a pension of €18,000 or an AMRF of €119,800*.
• Your funds can remain invested and therefore continue to grow.
• When you die the balance of you fund passes to your estate.
• Tax Free Lump Sum 25% of Fund.

• Disadvantages
• It is possible to use up your entire fund. If you draw more out of it than it is growing by.
• AMRF minimum investment of €119,800 must remain invested to age 75. Surplus may however be taken.
• Your fund could be reduced in value, or lost completely, due to poor investments returns.

*was €63,500 – changed to €119,800 in Finance Act – February 2011

The value of the ARF passes to the estate of the deceased. If the policyholder wishes the value of the ARF to pass to a particular person then he should specify this in his will. If the value of the ARF (or AMRF) passes to the spouse, then the spouse will have the option to draw the cash which is taxable at the marginal tax rate of the deceased, or transfer this value into an ARF in her/his own name. There will be no tax liability at that point, and subsequent drawdown of income from that ARF will be subject to income tax.

Summary of Tax Implication for ARF/AMRF

Death of surviving spouse ARF

The self employed can take retirement benefits from age 60 onwards without actually retiring, and continue paying into a pension, therefore an individual earning for example €100,000 taxable income in a year, if he is over 60, can put 40% of this into a personal pension, gaining full tax relief. At the end of the year he can then put this €40,000 into an ARF, from which he can take 25% tax free and he can draw the balance but it is taxable at the normal rate.

Effectively therefore he has reduced his taxable income by 25%.

Over the last number of years there have been a number of Geared Property funds from Insurers, Banks and Insurance Brokers. They have been focused on residential and commercial property in Ireland, U.K. and Europe.

The appeal of Geared Property Funds is simple, typically they borrow 75% of the purchase price of the property being purchased. This effectively means that an Equity Fund or a traditional Managed Fund needs a return that is four times better just to yield the same return to the client. Example: if two clients both wish to invest €100,000 and one decided he would invest in shares then he would get €100,000 worth of shares for his investments. However, if a second investor decided to invest in geared property, it is likely he would get €400,000 worth of property, i.e. the insurance company would use his €100,000 as a deposit, borrow €300,000, the interest on which would be paid for by the rent from the property and he would therefore have an exposure to €400,000 worth of property. If the equity market (shares) increased by 10% then the first investor will have a return of 10%. If however the property fund increased by only 5% it would be 5% of €400,000 which is a return of 20% on the €100,000 that the client invested. This gearing concept has been well understood by some small investors in the last 20 or 30 years and is now available from insurance companies and/or pension funds. The down side is that if property should go down in value, the losses could also be multiplied. As with all of these investments, the key is to spread your risk i.e. have money in as many different property syndicates/funds as is possible. I therefore recommend that clients have no more than €50,000 or 20% of their fund in any one investment.

When investing premiums on behalf of policyholders insurance companies predominately only invest in four areas

• Property, typically commercial property
• Equities, also know as stocks and shares usually quotes on the various stock markets
• Gilts, also called bonds which is money lent to Governments or large corporations at a fixed rate of interest.
• Cash – quite simply money on deposit.

There is obviously a different risk profile to each of these types of investments and historically equities or shares out-perform the other three long term, property is the second best, gilts the third and cash the least productive. However cash is the least risky. Insurance companies put managed funds together which is a combination of the above four. A Consensus fund is a computerised programme which monitors the average asset allocation for the various managed funds and mimics this allocation. This results in a year on year return which is never in the top quarter or never in the bottom quarter, it is typically right in the middle and historically it has been found that if a managed fund can be average every year then it s long term returns are in the top quarter. This makes a consensus fund a very good medium risk investment.

It should be borne in mind that if there is a very bad year e.g. 2008/2009 and stock markets are commercial property decline in value then your consensus fund will show a negative rate of return as would the underlying investments of equities, gilts, cash and property.