InsuranceGuide

Mortgage life insurance

By Madeline Thomas editorial@consumerchoices.co.uk

Mortgage life insurance, is designed to pay off the mortgage if you die. It's a relatively low-cost form of insurance, but follow these pointers to ensure you get the right cover.

What is mortgage life insurance?

It's important to understand what mortgage life insurance is and what other similar life and protection products are available.

Mortgage term insurance - is a type of life insurance policy taken out to cover a set period of time – in this case the length of the mortgage – which is known as the “term”. Just as the amount outstanding on the mortgage reduces over time, so does the amount the mortgage term assurance pays out if you die.

Level term insurance – is life insurance that covers a set period of time and pays out an agreed lump sum upon death. Unlike mortgage term assurance, that sum does not reduce, so whether the death should occur in year 2 or year 22 of the policy, the payout would be the same.

Whole of life insurance – is not restricted to a set period of time but will pay out in the event of death, whenever that occurs. Because it has to pay up eventually, it is structured differently. More about whole of life insurance.

As with most other financial products, there isn't a one-size-fits-all solution and there are plenty of opportunities to throw money away on something unsuitable.

The Consumers' Association, Which?, in its 2009 report on life insurance, points out that many people still take out insurance to cover the mortgage from their mortgage lender, yet that company may not provide the best value product. If the policy from their lender costs £5 a month more than a suitable alternative, that individual could end up paying £1,500 more over a 25-year mortgage term.

How to choose the right cover

Mark Loydall, of Cambourne Financial Planning, says mortgage term insurance has its place but it is not necessarily the best value, particularly for younger lives.

“There are lots of things to consider, not least the fact that taking out life insurance when you’re young and healthy is a lot cheaper than taking it out even 10 years later.”

As one gets older, life expectancy reduces and premiums increase. Figures from Which? show that a 34-year-old will pay around half the level of premiums of a 44-year-old for the same cover. And a 34-year-old woman will pay less than a 34-year-old man because women have a longer life expectancy.

Someone with no dependants who has a stable job, is unlikely to change profession – or company – and who has a death in service benefit may not need insurance at all.
A mortgage holder with a family may wish to leave money behind for the family to live on as well as something to pay off the mortgage. While the amount the mortgage needs will reduce over time, the amount the family needs may not. They might need level term insurance.
A mortgage holder whose children will have grown and gone by the time the mortgage is repaid could find mortgage term insurance suitable.

“Rather than look at premiums, people should look for the value the product provides,” Mr Loydall says. “A company that does cover for £12 a month might do the basic job but someone else with a policy for £15 could offer a lot more cover for that £3. Insurance is about finding the best value and the right overall protection, it's not always about what’s cheapest.”

Risky business

Some people will pay a little – or a lot – more for the same cover. These are individuals the insurance companies regard as “risks”. Those risks broadly fall into four categories:

Lifestyle: Smokers, heavy drinkers, those who are overweight and don’t exercise will be charged more.

Adrenalin junkies: Insurance companies, tend not to mind the odd skiing holiday but can get cold feet if you’re a regular sky-diver, wing-walker, pot-holer, or rock climber.

Dangerous jobs: Those in the armed services, or undertaking potentially dangerous work (some security work, certain police professions, roofers, scaffolders, anyone working with heavy machinery) may be charged more.

Medical conditions: Insurers vary hugely on how they treat different medical conditions. Some don’t charge any extra for mild asthmatics; others charge up to 25% more. Some don’t cover diabetics at all or cancer survivors; others cater specifically for those with medical conditions. Specialist insurers such as The Totally Insured group (www.totallyinsuredgroup.co.uk), or The Insurance Surgery (www.the-insurance-surgery.co.uk) should be able to help when mainstream insurers prove unwilling.

An at-a-glance guide to cutting insurance costs

Lose weight

Insurers will calculate whether someone is overweight based upon the Body Mass Index and can increase premiums by anything from 50% to 300%. So, to cut insurance costs, lose weight.

Stop smoking

Smokers pay about twice as much as non smokers for life insurance. To qualify as a non smoker you must have stopped smoking for at least a year, after which just about any product will be cheaper than your existing premium.

Shop around

Just make sure you have new cover in place before cancelling the old one.

Get advice

This is especially important for those with lifestyle issues, or who want to know whether to get a joint policy or individual ones, or protection as well as insurance. An independent financial adviser could provide the answer.

Review regularly

Taking out one policy for 30 years can often do the trick. But if you have changed profession, altered lifestyle, changed hobbies, married or had children in the intervening years, that could all impact upon your premiums. Have a look and see if you can save money.

Buy early

Insurance is cheaper when you’re young, so take it out when you pose the least risk to an insurance company.

Guarantee your premiums

Some policies charge the same each month for the lifetime of the policy (guaranteed premiums). Others charge more each year as you get older. Guaranteed options help you know exactly what you’re paying.

Be honest

Honesty is the only policy when it comes to insurers because, if there is any sign of underplaying the truth, they may not pay out at all.