Is whole-of-life policy worth it?

Q I am a 71-year-old pensioner who was widowed at the age of 47. I took out a whole-of-life policy about 15 years ago. I was recently informed about a significant increase in the monthly premium on this policy. My financial advisor also told me that he would not sell the whole-of-life policy I have today because he now knows how useless it is. Should I cancel it? Brigid, Co Laois

A significant benefit of whole-of-life policies is that the life cover benefits are applicable for the whole of your life, while premiums continue to be paid. The intention is that the savings element built up in these policies will pay for the more expensive protection premiums applicable as you get older.

HOWEVER, the reality for consumers has been that the savings element has struggled to cover the increased premiums and therefore often, the price of these plans increases significantly as you get older.

You have no control over the increasing costs applicable and the premium reviews will occur more frequently in later years. To maintain your benefits, you must continue to pay the reviewable premium set by your provider.

You have an ongoing business relationship with your advisor and you proactively put this policy in place 15 years ago.

As a 71-year-old widow, it may be an opportune time to ask why you want life cover —and why specifically is there a requirement for you to have this policy in place.

Rather than having your financial planning controlled by the policy provider, there are some steps that you could take now to have greater control of your financial future.

First: consider applying for a term policy instead of a whole-of-life policy. Life cover for a specific period at a fixed price may be more suitable for you — depending on your need for life cover in the first instance.

Life cover is mostly put in place to ensure that the lifestyle of dependants is not altered by your death — either by a drop-off in income or the inheritance of debt. So do you have dependants and is there anyone reliant on you financially who will be impacted by your death?

If the reason for life cover is to cover a loan outstanding, a term policy would cover this risk and can be set up to end at the same time as the loan.

A whole-of-life policy will be more expensive for loan cover than a term policy is as there is no end date for the whole-of-life policy.

So rather than having the unnecessary cost of a whole-of-life policy which goes beyond the term of the loan, a term policy for the duration of the loan would be more cost effective.

Second: consider organising your investments and savings separately. If a significant portion of your savings are tied up in this policy, currently the provider [of the policy] is controlling these funds and using them towards your protection benefits as required. You can take control of these funds by organising a separate investment plan and you can continue to grow these funds or draw down an income from them.

Note that if you change your benefits to a term policy, you should not stop existing life assurance benefits until you have been underwritten for a new policy application.

Time to open current account?

Q I am an old age pensioner. I have a small deposit account with AIB. My friends tell me I should have a current account — and to close my deposit account as I would be able then to get my pension paid into the current account, get a debit card and draw money out without going to the bank. Would this be a good idea? Noel, Co Limerick

Yes, for various reasons — both normally and in the current environment, it would be advisable to have a current account. Presumably from your question, you are collecting your pension and then holding it in cash or lodging it to your deposit account. Your friends are correct.

By opening a current account, your pension can be paid electronically into this account. You can then withdraw money as it is required. There would be no need for a deposit account and the associated costs — unless you wish to build up a sum of money separately.

It is worth noting that up until the end of last November, if you held €2,500 in a current account with AIB, no maintenance fees would be payable. This has since changed and a maintenance fee of €4.50 every three months (€18 a year) is now applicable.

Wise to close investment fund?

Q I am a senior citizen with a Bank of Ireland investment fund for the past 18 years. I have not gained much in that time because of the taxes and management fees that are stopped every year. Now, with Covid-19, I am just wondering would now be the time to close this fund and where might one invest for best returns? Derek, Co Kildare

Rather than focussing on where you may get the best returns, put you and your lifestyle at the forefront of the conversation. You mention that you have a fund with Bank of Ireland for the last 18 years.

Was there a strategy around this investment with specific objectives or were you simply being prudent with your money by building up an investment fund?

Also, where is this fund invested and has the risk profile (that is, the risk you are carrying by having money invested in this fund) altered over the 18 years?

For me to give you the most relevant advice for this investment, its importance must be clarified first. You mention that you are a senior citizen.

Typically, just after retirement, income requirements increase as some life goals are met and then gradually decrease in later years.

If this fund is needed to supplement your lifestyle now, an income facility can be organised to ensure that the funds are structured in such a way as to maintain your investment while giving you an income.

You ask that with Covid-19, would now be the time to close the fund. If the fund is on deposit or in similar lowrisk investments, Covid-19 will have little impact. One of the key lessons of investing is to tune out the noise and not to react the markets. Trying to time the exit from your investment due to Covid-19 is timing the markets.

A better strategy is to have your goals clearly identified and to stick to them (within your risk appetite). Alternatively, if this is intended to form part of your long-term planning and you have no pressing need to access these funds currently, you can afford to take a longer-term view and take some more risk.

Investing in a well-diversified portfolio with exposure to different asset classes but a weighting in global equities would historically give you the best return over a period of investing of greater than five years.

The investment could be set up in such a way as to drip feed an income to you each year — while leaving the balance invested to gain a decent return over a longer period.

This would provide long-term income — and provision for care or estate planning, depending on where the plan fits within your overall planning.