Life Assurance is a topic that no one wants to talk about but is something that almost everyone has to pay for at some time in your life. Below are 3 of the main reasons for buying life assurance and the types of life assurance you will need.
3 Reasons for buying Life Assurance
- Buying your own home – Mortgage Protection.
- Starting a family – Life Assurance.
- Becoming self-employed – Income Protection.
Buying your own home – Mortgage Protection
When you buy your own home most people will go to the bank for a mortgage in order to afford the home – one of the banks conditions of getting a mortgage will be that you have taken out an adequate mortgage protection policy.
Mortgage protection is a life assurance policy that will pay off the mortgage outstanding on your home if you die before you have paid off the mortgage. So if you die with €100k left on your mortgage – the policy will pay the €100k directly to the bank.
When getting a mortgage the bank will try to sell you mortgage protection however there is nothing stopping you from buying mortgage protection from a different provider – often this is the cheaper and better option as banks in Ireland don’t compare the market for you only offer products from a single provider such as Irish Life. Independent financial advisors are able to compare market for you for cheaper more flexible policies than offered by your bank.
Starting a family– Life Assurance
Having your first child is often the main reason why people start considering taking out life assurance policies – so that their family is looked after if anything should happen to the parents.
Life assurance provides a lump sum for your dependents if you die which can be used for many reasons such to provide an income for when you’re gone or to pay for college fees etc.
The cost of life assurance will depend on the type of policy you choose, the amount you choose and the term of the policy. Other factors that will affect the cost will be your age, health & personal circumstances.
Becoming self-employed – Income Protection
Becoming self-employed is a big step and you need to consider what will happen if you are unable to work. In Ireland the self-employed are not entitled to anything if they cannot work due to health reasons unlike PAYE workers who are entitled to social welfare disability benefits.
Income protection will pay you up to 75% of your income if you can’t work due to illness or disability. It will start paying out once you have been out of work for a certain amount of time – the amount of time will depend on the policy you take out.
Tax relief is also available on the cost of income protection policies at the highest rate of tax you pay so this will lower the cost.
One area that a lot of people struggle with is understanding the time value of money – often when someone mentions this concept a lot of people take it as a signal to stop paying attention.
There are 4 concepts that you need to get your head around to understand the time value of money
- Present Value
- Future Value
Compound interest is when your interest also earns interest. So if you have savings earning 10% in the first year you will receive €10 Interest and then in the second year you will receive €11 in interest (110*10%)
Is the opposite of compounding. It is calculating the value you need to have on deposit today to get €110 in the future.
Present value is the value today of an amount in the future.
What would you prefer – to receive €100 today or receive €100 in a years time?
Automatically the answer is €100 today as you could put that €100 in a deposit account at 4% and it will be worth €104 in a years time, instead of €100.
Or to put it another way what would you prefer – to pay €100 in a years time or pay it today?
Again the answer is automatically a years time. As you could put €96 into a savings account today and it will be worth €100 in a years time.
So getting €100 next year is only worth €96 today. This is called the present value.
The future value is what your money will be worth in a years time compounded at the interest rate it is earning.
The future value of €100 compounded by 4% over a year is €104.
Use in the Real world
The time value of money is one of the building blocks of finance and it can get more complicated when you take into account inflation, cashflows at different times and different rates of return over the course of an investment – however, if you can get your head around the above example you will have a greater understanding of finance than most.
By understanding the time value and how to discount and compound money can make a huge difference to your financial health over the course of your life, as it can be used to calculate return on investments and in all aspects of personal finance.
The good news for first time buyers is that several providers have dropped their fixed rate mortgages for first time buyers with the market leading rate being offered by Permanent TSB at 3.29%.
However several of the lenders are now only offering the lower rates if first time buyers are able to come up with a bigger deposit.
The market leading rate is only being offered to first time buyers who can come up with a deposit of at least 20% of the house value. While the next best rate being offered is by KBC at 3.3% with first time buyers only required to come up with a deposit of 10%.
Compare mortgage rates on the Irish market at www.moneybags.ie/mortgages/
Several of the large providers have dropped the interest rates on their personal loans.However now several providers are charging different interest rates according to the loan amount you are applying for.
Ulster Bank are the most competitive for personal loans under €10,000 while Permanent TSB are most competitive for loans over €20,000.
Check out the new rates at http://moneybags.ie/personal-loans/
When comparing credit cards the starting point is to consider how you use your credit cards at the moment and how you intend on using the new credit card.
Which of the below uses do you intend on using the credit card for?
1. Emergencies and Online Purchases only
If you are like many who only use their credit cards for emergencies or buying online and you intend on paying off the balance in full before the grace period runs out, then you should consider credit cards which provide rewards for spending.
One of the best cards on the market to suit this use is KBC’s credit card on which you can earn up to 4% on purchases which can really add up over a year of use.
2. Once Off Purchases
If your aim is to use a credit card for once off purchases such as a holiday or Christmas expenses and then pay off over an extended period of time then the most important element to consider is the APR charged on purchases.
At the moment the best deal is AIB CLICK Visa Credit Card which charges 13.60% on purchases, a whopping 9.1% less in interest than the most expensive deals on the market.
On a once off purchase €3,000 paid off over a year this would mean over €270 less in interest charges.
3. Clearing Existing Balances
If you currently have a large outstanding balance on your credit card which you are trying to clear it is important to consider if you can save money by transferring the balance to another provider who is offering a lower introductory rate on balances transferred.
At the moment there are 4 providers (Permanent TSB,Tesco,KBC,BOI) in Ireland offering introductory rates of 0% for 6 and even 7 months.
If for example you have an existing balance of €3,000 on the most expensive card in the market and are paying 22.70% by transferring the balance to a provider with an introductory rate of 0% you could save over €300 in interest charges.
Always compare the market and make sure you are not paying more interest than necessary!! Use the moneybags.ie credit card page to compare the market
You have done the hard work and secured your first step on the career now its time to make smart choices.
Join the company pension scheme – This is something a lot of 20 somethings won’t bother with or prioritise but by contributing to your pension now will save you a lot of money in the future. Due to the power of compounding – the longer you give your money to grow the more you will have in 40 years. Often large corporates in Ireland match your contributions so if you give 5% of your salary they will give 5% – ensure that you don’t lose out on matching contributions.
For example if you are a newly employed graduate on a starting salary of 21000 and you employer offers to match your contributions to your pension up to 5%. It will cost you just €66 a month to contribute €175. This may not seem like much but if you contribute for a year then stop that is €2100 which could grow to €45621 by the time your 60 if you average a return of 8%. If you continue contributing the same amount throughout your working life and it achieves the same average return of 8% this €66 monthly cost to you would grow to over €500,000.
In your 20’s between you and your employer you can contribute up to 15% of your salary to you pension and still avail of tax benefits.
Get Mortgage ready –Nearly every Irish person in their 20’s aim to get on the property ladder as soon as possible. Give your self the best chance by starting a savings habit that will build your deposit and also prove to the banks you will be able to meet mortgage repayments. Avoid building up credit card debt or becoming overdrawn as well as setting up a direct debit to you savings account every month. Check out our regular savings comparison table to find the best rate.
Avail of any benefits offered by company – Find out what benefits your employer offer and make sure you avail of them. Some companies offer health insurance/dental insurance/travel insurance make sure you are registered as soon as possible on the company scheme and make sure you are not double insured on any of these. Avail of the tax saver on your commuter ticket or the cycle to work schemes.
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