Unravelling life policies
The Maltese were never going to be immune to the financial anxiety gripping the world, but there is hardly need to revert to stuffing cash under the mattress in order to put money aside. Despite the international gloom, there is a wide range of...
The Maltese were never going to be immune to the financial anxiety gripping the world, but there is hardly need to revert to stuffing cash under the mattress in order to put money aside.
Despite the international gloom, there is a wide range of options on the local market to help even faint-hearted savers and investors plan their financial future, according to Tonia Parascandalo, training and marketing manager at Bank of Valletta's Bancassurance Office.
She says there is a collection of life policies available to suit any earner, any risk profile from adventurous to cautious, and any age group.
Traditionally, insurance policies were thought of as banking security. Products are so diversified now that anybody with dependants should consider taking out life assurance.
"The earlier one applies, the better," Ms Parascandalo pointed out. "The rates are lower and there are usually no medical implications. A 25-year-old would generally go through at ordinary rates, unlike a 50-year-old who might have to pay a premium loading. Anybody can take out a life policy for as much as they can afford."
How do you convince a 25-year-old to take out a life policy or a retirement plan? Ms Parascandalo admitted that younger people with no dependants are harder to convince, despite some policies involving setting aside only as little as the equivalent of a night out per month.
Young single parents, she said, should recognise that a life policy will not solve all their financial worries but will ease the burden - particularly if both members of a couple are income-earners and suddenly have to base their financial planning on one salary.
Most text books indicate that a policy should cover four times the holder's annual salary as a basic rule of thumb, but much depends on lifestyle. People with additional commitments like private school fees would require a policy to cover a larger sum.
Ms Parascandalo explained that the British culture of inheritance tax planning has yet to filter through to the Maltese market, but it is a useful option. Life policies can be taken out to cover just the amount heirs would be due to pay in succession duty, so policy holders spare their children, for instance, that added burden.
"There is another attractive feature to life policies," she remarked. "In general insurance, assets such as cars and property cannot be insured twice. Yet anyone can have as many policies as they can afford, with the policies taken out with one or a handful of institutions. Many business people particularly have more than one because they take out life policies with loans. Incidentally, it does not always pay to extend life policies. Policies taken out earlier will mean the premiums remain level."
In August 2005, an amendment to civil law made it possible for life policy holders to name beneficiaries. The beneficiary form may be amended at any time and even supersedes a will. On death or policy maturity, the insurance company will contact the beneficiary directly. An added bonus is that the proceeds of life policies are tax-free under current legislation in case of a death claim, whatever the amount. Neither are they subject to succession duty.
Ms Parascandalo explained that policy holders not informing beneficiaries of their decision reserve the right to name a different beneficiary if the relationship changes. Policy holders rarely indicate designated beneficiaries who have to be informed that they are entitled to the proceeds on the holder's death - changes cannot be made to the policy without the designated beneficiary's signed consent.
Life assurance can also be used as alternative investment vehicle. With-profit endowments come with tax advantages under current legislation. As annual bonuses are added under with-profits policies, there is capital growth in the long term which, in many cases, makes life policies more advantageous than term deposits. Ms Parascandalo explained that there are single premium policies which allow holders to withdraw the bonus annually, tax-free, without being subject to final withholding tax. Any company that administers a with-profits fund pays a 15 per cent exit tax to the Commissioner of Inland Revenue so the government is still getting its due. In reality, she pointed out, tax is still taken into account when the bonus is declared.
Conservatives often like to consider endowment policies which are simply saving plans with built-in life cover. What makes them particularly attractive to the risk-averse is that there is capital protection. All they involve is setting aside a sum monthly or annually and a bonus is added, usually on a compound interest basis to the policy account.
The elderly are particularly attracted to single premium with-profits endowments, Ms Parscandalo explained. In the case of solely investment-related policies, there is no medical-related paperwork and policy proceeds on death, surrender and maturity are tax-free.
Between 1994 and 2007, the local rate of return has averaged out at four to five per cent. Bank savings accounts currently offer 0.25 per cent interest.
With a savings or retirement plan, the client determines the premium and the frequency, besides the maturity date. There are usually cash surrender charges if the policy is terminated before maturity date. Ms Parascandalo said cash surrender charges may be applicable on the first few years or the entire duration of the plan, depending on the company and product type.
Unit-linked policies, meanwhile, were introduced by European financial institutions in the 1970s. They involve drawing up a client's risk profile to help banking professionals guide clients on investments to suit that profile. Life cover may even be roped into the policy. Insurance companies offer this alternative because it is these options which offer better returns over the long term.
"Risk profiles determine investment choices," Ms Parascandalo explained. "For the more conservative, there are retirement plans that give the option of having 50 per cent of the investment with-profits, so there is capital protection and capital growth, and 50 per cent which is unit-linked. This would increase the chances of higher rates of return. They are offered as regular premiums and lump sum investments."
Some financial institutions offer clients the option to transfer gains made from unit-linked investments to the with-profits fund five years before retirement, she added. This can also include an element of life cover with a sum assured, so there is a combination of retirement planning, with estate planning in one policy. An added element of flexibility in some retirement plans is that these usually allow for 'contribution breaks' of, say, five years, after which the policy holder can re-start contributions.
The concept of bancassurance originated in France. Ms Parascandalo described how insurance companies originally offered 'plain vanilla' products like life cover, but soon saw the advantages of joining forces or even merging with banks.
Banks moved closer to insurance companies and began to offer life policies.
Insurance companies, in turn, now offer capital-guaranteed products that would normally have been offered by financial institutions.
Some banks opt to establish separate life companies to run their insurance business. Bank of Valletta is an enrolled tied insurance intermediary of Middlesea Valletta Life Assurance Company Ltd.
Despite the international gloom, there is a wide range of options on the local market to help even faint-hearted savers and investors plan their financial future, according to Tonia Parascandalo, training and marketing manager at Bank of Valletta's Bancassurance Office.
She says there is a collection of life policies available to suit any earner, any risk profile from adventurous to cautious, and any age group.
Traditionally, insurance policies were thought of as banking security. Products are so diversified now that anybody with dependants should consider taking out life assurance.
"The earlier one applies, the better," Ms Parascandalo pointed out. "The rates are lower and there are usually no medical implications. A 25-year-old would generally go through at ordinary rates, unlike a 50-year-old who might have to pay a premium loading. Anybody can take out a life policy for as much as they can afford."
How do you convince a 25-year-old to take out a life policy or a retirement plan? Ms Parascandalo admitted that younger people with no dependants are harder to convince, despite some policies involving setting aside only as little as the equivalent of a night out per month.
Young single parents, she said, should recognise that a life policy will not solve all their financial worries but will ease the burden - particularly if both members of a couple are income-earners and suddenly have to base their financial planning on one salary.
Most text books indicate that a policy should cover four times the holder's annual salary as a basic rule of thumb, but much depends on lifestyle. People with additional commitments like private school fees would require a policy to cover a larger sum.
Ms Parascandalo explained that the British culture of inheritance tax planning has yet to filter through to the Maltese market, but it is a useful option. Life policies can be taken out to cover just the amount heirs would be due to pay in succession duty, so policy holders spare their children, for instance, that added burden.
"There is another attractive feature to life policies," she remarked. "In general insurance, assets such as cars and property cannot be insured twice. Yet anyone can have as many policies as they can afford, with the policies taken out with one or a handful of institutions. Many business people particularly have more than one because they take out life policies with loans. Incidentally, it does not always pay to extend life policies. Policies taken out earlier will mean the premiums remain level."
In August 2005, an amendment to civil law made it possible for life policy holders to name beneficiaries. The beneficiary form may be amended at any time and even supersedes a will. On death or policy maturity, the insurance company will contact the beneficiary directly. An added bonus is that the proceeds of life policies are tax-free under current legislation in case of a death claim, whatever the amount. Neither are they subject to succession duty.
Ms Parascandalo explained that policy holders not informing beneficiaries of their decision reserve the right to name a different beneficiary if the relationship changes. Policy holders rarely indicate designated beneficiaries who have to be informed that they are entitled to the proceeds on the holder's death - changes cannot be made to the policy without the designated beneficiary's signed consent.
Life assurance can also be used as alternative investment vehicle. With-profit endowments come with tax advantages under current legislation. As annual bonuses are added under with-profits policies, there is capital growth in the long term which, in many cases, makes life policies more advantageous than term deposits. Ms Parascandalo explained that there are single premium policies which allow holders to withdraw the bonus annually, tax-free, without being subject to final withholding tax. Any company that administers a with-profits fund pays a 15 per cent exit tax to the Commissioner of Inland Revenue so the government is still getting its due. In reality, she pointed out, tax is still taken into account when the bonus is declared.
Conservatives often like to consider endowment policies which are simply saving plans with built-in life cover. What makes them particularly attractive to the risk-averse is that there is capital protection. All they involve is setting aside a sum monthly or annually and a bonus is added, usually on a compound interest basis to the policy account.
The elderly are particularly attracted to single premium with-profits endowments, Ms Parscandalo explained. In the case of solely investment-related policies, there is no medical-related paperwork and policy proceeds on death, surrender and maturity are tax-free.
Between 1994 and 2007, the local rate of return has averaged out at four to five per cent. Bank savings accounts currently offer 0.25 per cent interest.
With a savings or retirement plan, the client determines the premium and the frequency, besides the maturity date. There are usually cash surrender charges if the policy is terminated before maturity date. Ms Parascandalo said cash surrender charges may be applicable on the first few years or the entire duration of the plan, depending on the company and product type.
Unit-linked policies, meanwhile, were introduced by European financial institutions in the 1970s. They involve drawing up a client's risk profile to help banking professionals guide clients on investments to suit that profile. Life cover may even be roped into the policy. Insurance companies offer this alternative because it is these options which offer better returns over the long term.
"Risk profiles determine investment choices," Ms Parascandalo explained. "For the more conservative, there are retirement plans that give the option of having 50 per cent of the investment with-profits, so there is capital protection and capital growth, and 50 per cent which is unit-linked. This would increase the chances of higher rates of return. They are offered as regular premiums and lump sum investments."
Some financial institutions offer clients the option to transfer gains made from unit-linked investments to the with-profits fund five years before retirement, she added. This can also include an element of life cover with a sum assured, so there is a combination of retirement planning, with estate planning in one policy. An added element of flexibility in some retirement plans is that these usually allow for 'contribution breaks' of, say, five years, after which the policy holder can re-start contributions.
The concept of bancassurance originated in France. Ms Parascandalo described how insurance companies originally offered 'plain vanilla' products like life cover, but soon saw the advantages of joining forces or even merging with banks.
Banks moved closer to insurance companies and began to offer life policies.
Insurance companies, in turn, now offer capital-guaranteed products that would normally have been offered by financial institutions.
Some banks opt to establish separate life companies to run their insurance business. Bank of Valletta is an enrolled tied insurance intermediary of Middlesea Valletta Life Assurance Company Ltd.