Mary Holm: Do we still need a life policy when we're 64?

In your 60s one of you could likely cope financially if the other dies. If so, ditch the costly life cover, dump debt and live a little. Photo / 123RF

COMMENT:

Q: A quick question about life insurance premiums versus loan payments. My wife and I are in our mid 60s (me 66, her 64). Our life insurance premiums are becoming unaffordable, and due very soon to rise considerably again.

Between now and 2024, if we kept the policy, we would have paid out approximately $40,000.

We are both still working, I'm self-employed (light work, promotional product/sales) and my wife is a full-time teacher.

We have a total of $160,000 in savings. This increases monthly due to us being in KiwiSaver and teachers' super and my business savings. Along with this we have about $850,000 in our home equity.

We have a relatively modest bank loan of $92,000 for home renovations.

To me it seems a better option to use the savings we have for financial security, and pay off the loan far quicker, using the premium payments we would otherwise be making.

Do you have any advice regarding this please?

A: It seems to me that all the wrong people have life insurance.

The insurance industry tells us that many New Zealanders who should insure their lives don't. And that's probably right. If your death would leave your family in financial difficulties, it's negligent not to have at least some life insurance — and that includes caregivers as well as income earners.

But as you get older it's worth reconsidering. The premiums get really high, as you say.

And the truth is that if you or your wife died — sad though that may be — the survivor would probably need less money than you need as a couple. People sometimes say that two can live as cheaply as one, but it's never quite true.

If I were you, I would stop the insurance. Don't look back at what you've already spent on it. That bought you peace of mind at a time when you probably did need the cover. And having life insurance that you don't claim on sure beats the alternative!

But now's the time to get rid of that home renovations loan — and not just with the money that would otherwise have gone on insurance premiums. You should probably use some of your savings to pay it off straight away.

The way it works is this: If the interest you're paying on the loan is higher than the returns you're making on your savings, after fees and tax, you're better off paying off the loan.

Let's say the interest on the loan is 5 per cent. If your savings are in riskier KiwiSaver funds and so on, it's quite possible you've earned more than 5 per cent in recent times, even after fees and tax. But that may not continue. There's a fair chance of low or negative returns.

I suggest you get rid of the loan. And then you can concentrate on rebuilding your savings.

Offset options

Q: I can sympathise with the person in last week's column making the decision between paying down a flexiloan and adding to savings.

However, we do not have to make this decision, as my bank has an offset mortgage arrangement that allows you to have up to 10 accounts, all with different names, with the total of all these accounts being offset against the mortgage. You can have an account named savings while still having the total offset against your mortgage.

That's not all. Other family members can have one or more of the 10 accounts in their name, and they are the only person who can access that particular account.

Our children used these accounts when saving a deposit for a home. We would pay to them each year the amount of interest we saved on our mortgage, thus at the time they got a clear 6.4 per cent on their money.

Bringing these types of accounts to the attention of your readers could eliminate the difficulty of them having to choose between paying down a flexiloan or savings.

A: You're quite right. I didn't go into this last week, as our reader was already set up with a flexiloan — sometimes called a revolving credit mortgage.

But yes, with an offset mortgage you can keep your savings in a separate account and still have the balance offsetting your mortgage. These loans are offered by several banks including BNZ, Kiwibank and Westpac.

You don't earn any interest on the offset accounts. But because the account balances reduce the size of the mortgage on which you pay interest, you are effectively earning the mortgage interest rate in those offset accounts.

Confused? Try this: Not having to pay interest at, say, 5 per cent improves your wealth in the same way as earning 5 per cent interest after tax. That's a pretty wonderful return on a bank account!

Broadly speaking, it's actually the same issue as in the previous Q&A — comparing reducing debt with investing.

You're obviously aware of how this works, and have given your children the benefit — a great idea.

As far as I know, all offset mortgages — and revolving credit mortgages for that matter — are at floating rates only.

Those rates are higher these days than fixed rate loans, so it's best to have only a bit more than you think you can offset in the offset mortgage account. The rest of your mortgage should be at a fixed rate. But consider changing that when floating rates drop below fixed.

If last week's correspondent, or anyone else who already has a mortgage, would prefer an offset mortgage, ask your lender if they offer these loans and how you can switch. If that's not going to work, ask a mortgage adviser if they could help you move to another lender.

Note that you lose some flexibility if you switch from revolving credit. Those loans allow you to increase your borrowing whenever you want to — perhaps for home maintenance or renovations — back up to your maximum loan level. I don't know of any offset loans that permit that.

PIR problem

Q: Recent articles in the Herald advise taxpayers to ensure that they use their correct PIR rates for their investment funds such as KiwiSaver.

None of the articles address the situation though where investment funds are held in the name of joint account holders with differing PIR rates.

It appears that the IRD recognise that most systems only allow for the inclusion of one PIR rate for a portfolio. In my case my wife and I are joint account holders of managed funds. My PIR rate is 28 per cent while hers is 17.5 per cent.

Bearing in mind that the IRD do not provide refunds for taxpayers whose PIR rate is too high (which is an inequitable situation in itself), it is only natural that I would choose 17.5 per cent as the PIR rate for our managed funds.

This means that I will need to advise in my own tax return that 50 per cent of the value of taxable returns achieved by the managed funds have been undertaxed, requiring me to pay a lump sum on assessment, with possible late payment interest.

Do you agree that taxpayers should be made aware of this shortcoming and not feel pressured to increase their PIR rates on their investments unnecessarily?

A: Firstly, let's look at PIR rates in KiwiSaver — where there's no problem with joint accounts.

As you say, there's been a fuss recently about the fact that 550,000 people have underpaid tax in KiwiSaver and other investments, and another 950,000 have overpaid — all because they were using the wrong PIR rate.

Inland Revenue has now said, "From mid-July 2019, we'll begin proactively contacting customers who are on an incorrect PIR to let them know they need to change it to avoid paying too little or too much tax in the future. They can then contact their investment provider to change their rate.

"And in the future, we'll contact customers during the year if we identify they are using an incorrect PIR. This will be an on-going process to ensure that customers can get things right from the start."

A new Inland Revenue system, that groups together all of a person's income from different sources — such as wages and KiwiSaver — has enabled the department to do this. PIR rates depend on both sources of income.

"In the past our old system did not do this automatically and we relied on people and their investment providers to make sure they were on the right rate," says Inland Revenue deputy commissioner, Sharon Thompson.

She notes that it's legislation, not IR rules, that stop the department from refunding people who have overpaid their KiwiSaver tax. So lobby politicians if you want that to change.

While you're at it, you might want to push for a simplification of PIR rates. It's not straightforward for many people to work out what rate they should be on, and if they don't tell their provider when they join KiwiSaver, they are automatically put on the top 28 per cent rate. So even if IR contacts them later, they will still be overpaying tax in the meantime.

What about stories of Inland Revenue asking people who have underpaid PIR tax in the past to pay that tax now?

"We will be looking to recover underpaid tax for the year ending March 31 2019, but we will not go back to previous years," says a spokesperson.

Turning to the problem with joint accounts, an Inland Revenue spokesperson confirms what you say.

I asked her the following: "The system seems to force couples in this situation to either: use the higher PIR rate of the two people, or have to file a tax return so the higher rate person pays the extra tax, even if they would otherwise not need to file a tax return. Is this correct?"

The reply: "The PIE regime was set up so that the PIE tax deducted is a final tax. The PIRs are based on each person's tax position and really only works for individually held investments unless the joint investors are eligible to use the same PIR."

Me: "Could he incur a late payment penalty in this situation, assuming he files his tax return on time?"

The reply: "If he files his return on time, and makes his payment as required, there'll be no penalties."

Still, the system just doesn't work well for people with joint accounts. But there's hope.

Says the spokesperson, "The Minister of Revenue has asked us to provide him with advice on options to improve the PIE regime now that everyone has their tax position squared up at the end of the year."

On reflection...

Q: I'm the corespondent called "Miffed in Mt Albert" in your last column. As usual you take these things on the chin — which is more than I do sheltering behind anonymity (well — not from you!).

Anyway, I obviously read your columns — and have done so for years. And yes I do delight in picking up on things I consider wrong — ex teacher syndrome — but I also enjoy them — so thanks!

And thanks for repeating my "one liners" back to me. That'll teach me (fat chance?) to be more temperate in my comments. I did have a good laugh (at my expense) when I read them BTW.

A: Thanks for an upbeat letter to end a rather gloomy column this week. There's got to be more to life than life insurance, mortgages and tax. Please.

Mary Holm is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or click here. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.