Irish Mortgage Brokers Blog

We were talking about health insurance, car insurance and credit unions this month on TV3’s personal finance slot. On health insurance in particular we highlighted that you don’t have to go from ‘having cover’ to having zero cover, instead you could opt for the likes of the Hospital Saturday Fund which is a cash plan (pays out on health related spending but isn’t like regular insurance).

Car insurance was also a topic - the new EU ruling will make it illegal to rate men and women differently based on their sex alone from 21st December this year.

Credit Unions were (and are) in the news because of problems they are having. We’ll be back with TV3 next month for more!

In this piece we were speaking to Sybil & Martin about the banks passing on rate cuts and what to do if you got flooded recently.

I had a wonderful debate today on Newstalk where we discussed the rental market, Threshold sent in their Chairperson Aideen Hayden. The debate was very informed, in particular Aideen was very sharp in the area of tenancy laws, I learned a lot during this interview.

Naturally there are always a few corrections - she corrected me twice; once on sub-letting and again on a statistic that I took from the PRTB annual report (going so far as to mention that she is on the board of the PRTB and that therefore I was wrong).

Alas, I have to offer a correction in return to a PRTB board member & chairperson of Threshold who is currently undergoing her PhD in Housing and who has a degree in Economics (all of these things were mentioned to me in backing up her argument [on and off air]); see the graph below - taken from page 33 of the PRTB 2009 annual report.

This is not advanced mathematics, just add up the Green and Blue parts of the chart and you get the 65% that I mentioned that I mentioned where part or all of the deposit was kept by the landlord. At the same time her take on the matter was that I was wrong/inaccurate and that in fact in over 70% of cases the deposit is refunded in full or in part.

This is merely taking your figures starting at different ends of the number line.

I did mention this after the show and she still insisted I was giving misleading information and that due to holding a degree in Economics that she didn’t need to converse on the topic any further. My impression of her is that I was both highly impressed with her encyclopaedic knowledge in her field of expertise but dismayed at the lack of engagement when challenged on simple numbers by a practitioner - because the point made was both fair and accurate depending on which side of the fence you read it from - I actually tried to raise this as we were leaving studio (about the blue part of the chart being a crossover in both stat’s) but it was not taken up.

The other correction was when I said that you can’t just sub-let a property, I write this condition is written into leases based upon my interpretation of the 2004 Act. Aideen said that this was not true that you could sublet if you wish. Which brings us to (2004 Act S16 sub section k)  Tenant may not assign or sub-let the tenancy without the written consent of the landlord (which consent the landlord may, in his or her discretion, withhold).

My interpretation was that this had to be written into the lease as a clause for them to be able to do it automatically [or they would need permission] - in this case (quoting law) it shows that you cannot just go ahead and do this without consent.

I have to admit, I don’t often walk away from such debates disappointed, in fact they are often a great education (even if it comes at the expense of being wrong a lot of the time!), but Aideen’s statements that my points are wrong/invalid simply do not hold when challenged, and as both a board member of the PRTB and Chairperson of Threshold I would have expected more.

Credit Default Swaps (CDS’s) are an over the counter (not bought or sold through an exchange) product which gives the buyer insurance in the case of a credit event (default) of the underlying (reference entity: often a bond). Effectively this brings together a long and short. The video below does a good job of explaining much of this, well worth watching.

Working in this business can be tragic at times, the nature of the industry is that we have seen many businesses and individuals financially ruined, but at least they are alive and well, ‘your health is your wealth’ as the saying goes.

Sometimes however, our customers don’t have that either, and people die. We can’t stop that, and we can’t help make it better in any way for the people affected with the exception of the financial implications.

A client of ours passed away earlier in the month, they had two houses and two mortgages. When we were first dealing with them we stressed the importance of protecting your family from the financial impact death brings, it is the greatest wealth destroyer of all (indeed, the greatest destroyer in general).

Our clients took our advice, covering their mortgages in full and in addition to that a further lump sum on the life of the breadwinner. Taking out this cover was a selfless act, the person who has ultimately created the payout has passed away in the process, but they have left the survivors financially secure.

I can’t tell you how many times we’ve had the situation of finding out a client died or became permanently disabled and they didn’t take our advice and because of it they will suffer financially, they are always the ones where we find ourselves saying ‘I should have made sure they took the cover’, although we are obviously not allowed to trade in a strong-arm manner, and rightly so.

Then there are examples like today, where we find out that the person has died, and that tragedy is offset (for our part) by knowing that we did our part in making sure that the family will not also face financial ruin. In our clients case they will be financially secure for the rest of their life and their children will be too. I think that once you have kids you start to appreciate the need for making sure they will be o.k. if something bad happens to you.

It is a dismal business to be in where satisfaction of a job well done sometimes involves the death of another, however, it is the ensured financial survival of those that remain which we are truly proud of, that of seeing advice with ensuing action work as it is supposed to in the case of the worst outcome.

In 1911 something interesting happened, the US Supreme Court made a ruling in the Grigsby vs Russell that allowed a person to essentially ’sell their interest’ in their own life assurance policy. The case was over a condition in an insurance policy that it shall be ‘void for non-payment of premiums’ as being only that it shall be voidable at option of the company. In other words, it wasn’t just up to the company’s (issuers) discretion. The second issue was the rule of public policy that forbids the taking out of insurance by one on the life of another in which he has no insurable interest does not apply to the assignment by the insured of a perfectly valid policy to one not having an insurable interest.

The idea of ‘insurable interest’ still stands as a central tenet in insurance, for instance, I can’t take out a life assurance policy on a stranger because I face no loss in the event of their death, in fact, if you were the beneficiary of a policy and couldn’t prove any insurable interest you wouldn’t receive payment, personally I have never come across an example, usually the insurable interest is that the other person is a spouse, or it tends to be things like joint mortgages etc.

The ruling changed the way that the life assurance market in the USA operated, it created what is called a ‘Secondary Market’, that means a market whereby things are traded after going into the hands of the first buyer. The Stock Market is by and large (other than IPO’s) a ’secondary market’, for instance if a company issues a million €1 shares it takes in €1,000,000. But if the share price goes to €1.50 the company don’t get the 50c uplift, rather that is a value being implied in the secondary market and is gained by the initial buyer when selling to the secondary buyer, the shares can change hands millions of times potentially and that all happens in the secondary market. When it comes to life assurance the trade is called ‘Secondary Life Settlements’ or SLS (we love our acronyms in finance).

So now you have a situation where a person can sell their life assurance to a non-interested third party, because it essentially becomes a piece of property just like a share. If a person is getting on in years and wants cash money they can sell the policy and a buyer can then pay the premiums, they are taking a chance in doing so, if the seller lives to be 100 the buyer loses out in a big fashion, if they die prematurely the buyer wins out.

There is an advantage though, the buyers can look for medically impaired policies, and in that there is an asymmetry of information because the insurance company can’t ‘re-underwrite’ the policy, they have to go with the decision made at the outset. So the typical seller who gets the best price is in their 70’s and has cancer or some other serious medical impairment.

It sounds horrible doesn’t it? Making profit from people who are terminally ill, on another, the seller may find that they are in receipt of money that they may not otherwise realise and this can be for a number of reasons, if one person in a couple is already dead and they have no heirs why would the surviving partner not want to cash in early and have the money? If they became cash strapped due to investments not working out they may find the cash in life better than the idea of somebody getting paid after they die, preferring to solve money problems now over bequeathing a settlement. It could also be to clear off a mortgage, lots of older people re-mortgaged homes that were mortgage free and instead of having reduced income (many are on fixed income) they would rather have zero debt.

The point is that in the majority of cases the person is a very willing seller, who wants or needs the cash. It would be great if a similar ruling was enacted in Ireland. On one hand life assurance is cheap here, but that is because it is set up in a way that ensures you never get a claim, decreasing term assurance being the best example. If we had a secondary market prices would rise but it would mean that you could get something (potentially) toward the end of your term, if you have a term assurance at present you get nothing once the term ends.

From an investment point of view it is an uncorrelated asset, people don’t die young due to recessions (some may but from an actuarial point of view - taking thousands of people into consideration they don’t), but stock markets do crash, they don’t live longer due to a housing bubble, so the biggest advantage for a well run SLS company or fund is that you are not really dealing with the standard macro-issues inherent in the majority of other asset classes. Like any asset class, there are hedging mechanisms such as longevity swaps.

The question is perhaps, give that death is a certainty,  why are more people not buying into it?

About five years ago I had a couple in with me who were buying a home, I was helping them to determine their insurance needs and I realised that they had literally no protection if either of them ever fell seriously ill - not via their job/employer schemes or individually. So I suggested that they consider some serious illness cover, it would have cost them about €20 a month but they were insistent that they only wanted what was ‘cheapest and nothing more’.

As an adviser, it isn’t my job to always accept what people say they want because often, with adequate probing and understanding they actually want something entirely different, a skewed but simple way of understanding what I mean is that when saving or investing the majority of people want ‘high growth and high security’ - when in fact, these two features are normally night and day, if there ever was an asset that could deliver high growth with deposit account style security then everybody would pile in and the market would adjust accordingly, therefore you need to find out what a person actually wants more, growth and the accompanying risk, or security and the accompanying lower performance.

Back on topic - I explained why they should have serious illness cover (also called critical illness) and they flat out refused to listen, I asked what would happen if one of them got seriously ill to which I was told ‘I’ll go to France’ (one of them was French), this is one of those answers that threw me entirely: I mean, after a decade I thought I had heard it all but the idea that you could have a heart attack and then just fly off to France as a meaningful solutions just baffled me, to the degree that internally we sometimes joke around in the office when somebody makes an error and in asking how they will rectify it they answer ‘I’ll got to France’, it has become an in house punchline (thankfully not required very often!).

Anyway, I got a call two months ago from the husband in this couple, asking me about their insurance policy, wanting to know if it had any benefits attached to it other than life-cover, I quickly responded ‘no’ but wanted to know more - then I heard a story that quite literally broke my heart, perhaps I am going soft in my age or since I became a parent but it goes something like this: The couple had a child six months ago, the mother had some sort of allergic reaction when the baby was 3 months old and her throat swelled rapidly, she actually wasn’t able to breath at one point, for long enough that when they finally got to a hospital that they thought she might die.

She lost air for long enough that she had severe brain damage, and now in her own husbands words she is ‘a vegetable’, this isn’t some old lady, some stranger, some random story, this is real life, people I had met and seen afterwards in full health. So the husband is left in a situation where he can’t go to work any more because he has a young baby and wife to look after, they don’t have any money and there has been no payout on the insurance policy because they opted not to cover the risk, ironically, things won’t improve if they go to France either, they have already looked into that.

They will be losing their home eventually as the arrears are building up rapidly and there isn’t a damn thing I can do about it to help, I’m angry about it…. While I couldn’t have saved this lady, I could have ensured that they had a lump sum with which to either pay off the mortgage, or to live off, or if they wanted to go to France then they would have been able to sell the unencumbered property or use the money to move there and live off while renting out the home, it doesn’t really matter, it would have given them options.

I didn’t make sure they bought what I knew they needed, instead I let them determine their needs and didn’t hound them to do what I knew was the right thing to do. I didn’t do anything wrong in that, the only power I have is to make a suggestion and weigh up the pro’s and cons’, the line I like to use when talking about insurance is ‘you must identify and quantify the risk, then take appropriate steps to mitigate that risk at a reasonable price’. If I had been more forceful they might have taken out the cover, but that kind of behaviour will actually get you in trouble with the Ombudsman - strong arm selling is wrong and shunned for a reason, but when you allow a client to supersede your knowledge, knowledge gained from a decade of experience, study and daily practice - then you are essentially powerless to do your job right.

I thought about calling a radio show or something to talk about this but after my first enquiry quickly realised that it isn’t the type of story people want to hear, if I had instead ripped off a granny it would be everywhere, but in failing to protect a person there was nothing worth broadcasting.

This is a real life story and it has taught me a valuable lesson: people need to know that bad things happen to regular people, Jade Goody is an example, Lance Armstrong is another, illness doesn’t discriminate between the rich and poor, or the unknown and the celebrity - Some cynics will say ‘you just wanted the extra money!’, and that is a fair accusation but the €120 difference it would have made to a firm of our size is meaningless, we won’t be made or broken on that. So if you ever happen to find yourself seeking my advice, please know in advance, my suggestions are based on something greater than statistics, it is based on several clients I have had the pleasure of knowing who are in some cases dead, or in others in seriously bad shape. This is the real world and clients have taken their own life, died in accidents, had serious illnesses and experienced all of the tragedies you read about daily, ‘protection plans’ don’t really protect you, they are in fact quite selfless, they only serve to financially protect the ones you leave behind for the most part.

And that’s the thing, if insurance and finance bores the hell out of you then you need to know a guy like me, because I love it, I love what I do and the fact that almost no other industry would allow me the ability to sit with people and figure out ways to help protect their family if something bad happens while changing their financial future for the better, and I believe totally that I can make any person better off financially - if you aren’t happy with your finances, it doesn’t have to stay the way it is now, if you want more of it then you can make a plan, and the truth is that even with markets in turmoil or all the bad luck in the world, many of our clients still come out on top because they also change the way they think about money, and about what they hope it can do for them, more importantly - what it can’t.

Rant over.