These can be an extremely good investment provided you can be absolutely certain you will continue to make the payments.
They have no surrender value and therefore there is a cash windfall to the Assurance Company from every plan that is cashed in early.
You should ensure that your children fully understand that the premiums must continue to be paid for the whole of the rest of both your lives however long you both might live...
Working out the potential benefits is relatively easy since you know the following:
Premium which is guaranteed
Payout which is also guaranteed -we just don't know when
Assuming various terms of say 20 years, 30 years etc
You can solve for the interest rate you are being offered
So the sum assured is €150,000 then we can solve for the interest rate as follows;
Term Interest Rate
20 Years 8.535%pa
30 Years 3.35%pa
For illustration purposes only
This is the equivalent annual interest rate that your premium would have to earn on average each year in order to match the guaranteed benefit.
How does that look compared to cash or fixed interest deposits?
Now factor this in.
A bank deposit would also be subject to Dirt at 41% whereas the life policy is exempt from personal taxation so you would need to gross up those numbers to get the equivalent return you would require from a deposit.
20 Years 14.46% Gross equivalent return
30 Years 5.67% Gross equivalent return
€2880pa in premiums for the next 30 years is a total of €86,400. Do you think you might have the best part of €100,000 that you would otherwise have sat on deposit for the next 30 years or more? If so then, it's worthy of further consideration.
However, what alternatives are there?
You could each give each of your children and grandchildren and anyone else for that matter €3000pa and that would also be tax free
You could use dwelling house relief
You could make a gift now and hope that the aggregation date moves forward (currently December 1991)
Risks:
· These assumptions all assume that you are underwritten and accepted at normal rates. If the premium is “loaded” due to medical underwriting the premium will increase and the marginal benefits would decline.
· The policy does not acquire a surrender value at any time and therefore if you fail to maintain the premiums, the policy will lapse with no value.
· The rates and bases of taxation may change in the future.
· I have assumed that the rate of personal taxation of bank deposits or investments funds will remain constant at 41% through the policy term. The actual rate of tax may be higher or lower than this.
· The value of your estate may be higher or lower than estimated in the future and therefore the impact of CAT may vary over time. Equally the levels and bases of Capital Acquisitions tax may change in the future
· There is a counter party risk associated with the Insurance Company
· Interest rates could go higher in the future making the implied return from the policy less attractive relative to bank deposits.
· Inflation will reduce the real value of the sum assured over time unless it is indexed