Life Insurance Explained
This a question that’s best answered on an independent insurance company’s website than at your mortgage salesman’s desk. The law would never make you buy insurance to protect your interests (car insurance is mandatory because it is meant to protect others). Just as buying coverage to protect your own car and its occupants (instead of just the other car and its occupants) makes a lot of sense in the event of an accident, buying mortgage insurance to protect your mortgage payments makes good sense.
Should the ultimate accident happen – the untimely death of the mortgage owner – a mortgage life insurance policy will take care of the payments due from that point forward. Any family left behind doesn’t have to worry about losing their home.
The question, then, is …
Your question shouldn’t be about whether you should get mortgage insurance or not. It’s a given that you should. Rather, you should wonder about where to buy it – from an independent insurance company or from the mortgage salesman who helpfully offers you insurance as an add-on.
As you can probably guess, buying anything as a captive consumer comes with the likelihood that you will be taken advantage of. Many consumer reports suggest that buying your mortgage insurance from an insurance vendor other than your mortgage lender can potentially save you as much as £5000 over a lifetime of premium payments.
Here’s what you need to think about ahead of shopping around
A number of factors affect what your mortgage insurance policy ends up costing you. The most important factor, understandably, is the size of the mortgage. The higher the value of your mortgage, the bigger the premium it is that you need to insure it. Insurance companies also look at how long your mortgage is. When a mortgage owner holds a 20-year mortgage, he could be old by the time the loan is all paid off. An older person is at greater risk of dying. Insuring a long mortgage, then, is more expensive.
The age you are when you buy your mortgage insurance and your lifestyle habits count, too. In short, everything that you would consider ahead of buying regular life insurance should matter to a mortgage life insurance buying decision, too.
You need to make sure that you disclose everything about yourself that places you at a greater risk of dying than the average person. If you don’t, the insurance company could potentially claim nondisclosure and back out of paying.
Other points that you need to think about before going shopping
- Should you buy your policy by yourself or jointly with your spouse? If you have a joint policy, you get the same payout for each partner. These policies are more expensive than single individual policies, though.
- What happens if the broker, agent or insurance company goes out of business? You should certainly look for a stable insurance business that’s been around for a while and that receives good reviews. In the event that the insurance company does bite the dust at some point, the government’s Financial Services Compensation Scheme protects your investment. The government will either find you a new insurance company to continue with or simply arrange to pay you in other ways.
- Your mortgage insurance payout is part of your estate. This means that the government can charge you inheritance tax on it. There’s one way to escape being taxed – you need to write the policy in trust when you actually buy it (you cannot do it later). When you write your policy in trust, the payout goes directly to the beneficiaries mentioned – it doesn’t first come into your estate. You just need to ask your insurance broker about this before you buy.
- Be wary of critical illness policies. Most people believe that these policies will help them with their mortgage responsibilities, should they fall seriously ill. These policies too complicated for such hopes, though. For instance, if you think that you are covered for injuries, your policy could have specific kinds of exclusions that you aren’t aware of. An income protection policy could be a better idea.
If the original question is still on your mind it’s time to look at the problem differently. Ask what you can do to get the cheapest deal you can find, instead.
Many people worry that getting a cheaper mortgage insurance policy somehow gives them inferior coverage. Mostly, this isn’t a sensible assumption. If you were buying a car insurance policy, you could have to think about their sneaky exclusions. With a mortgage insurance policy, though, things are simpler. The mortgage owner is either alive or he isn’t.
Looking for a cheap deal, pay particular attention to asking every broker that you can find. Some brokers are well-connected and can find you excellent discounts.