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Mortgage Life Insurance

 

Mortgage life insurance is designed to repay your mortgage debt should you, or anybody else named on the policy, die before the policy term expires.

Besides offering Life Cover, it is also possible to include Critical Illness cover and a number of other benefits on your policy if you so wish.

It makes sense to ensure that you have sufficient life cover to repay your mortgage if you die. This is particularly important if you own the property with a partner, or if you have a family.

Even if you are single, it would still be a prudent decision to take out insurance. You never know when your circumstances may change and you may find you are uninsurable when you come to apply in the future.

The main benefits of mortgage life insurance are as follows :

You can insure yourself to cover the mortgage debt for the exact term of the mortgage

You can protect both a repayment and interest only mortgage in different ways, which means you can make sure you keep premiums to a minimum

You can include other benefits at the time of application, such as critical illness benefit. This means that you have all of your cover in one policy, again helping keep cost to a minimum

You can keep the policy in place even if you change mortgage lenders or the amount you borrow (although you may need to consider a top-up policy)


 
 
 
The typical term to repay a mortgage is 25 years. During this time, most people will see many changes to their life and lifestyle - they could meet a new partner, get married, have children, buy one or more new homes.

Unfortunately during a 25 year period, statistics also tell us that, of all deaths, at least 20% of those will occur in men aged between 25 – 65. Female deaths in the same age range is over 12%. *

Even if you are a single person when you buy your first property, it makes sense to protect your mortgage from the outset. As we have pointed out, there could come a time in your life where the insurance providers consider you uninsurable due to poor health or accident. Imagine how you would feel if you had a young family and found you could not insure yourself, even though you could have when you first bought the property.

Obviously cost is important, and so you will probably only want to insure yourself for the amount you will owe to your mortgage lender during the period of the loan.

Also the type of mortgage could have an impact on the premium.

An interest only mortgage is one where only interest is paid during the term of the mortgage, and so the mortgage debt doesn't reduce. The amount originally borrowed has to be repaid in full on the day you redeem the mortgage. To protect this type of mortgage, you need a policy that will pay out the full amount of your mortgage at any point during the mortgage term - whether you die in the first year of your mortgage term, or the last year. This is known as a level term policy.

If you have a repayment capital and interest mortgage, then slowly over the term of the mortgage you reduce the amount you owe to the mortgage lender. It is possible to buy a policy where the amount paid out reduces approximately in line with the reducing mortgage debt (assuming mortgage interest rates stay within a certain range). This is known as a decreasing term policy and because the amount to be paid out reduces, they are normally cheaper than level term policies.

If you are concerned about any risk associated with decreasing term insurance then, if you can afford the premiums, you could be better off opting for a level term policy. Any surplus cash would of course go to your family if you died during the policy term.

If you want to discuss your case in greater detail, then please call us on 020 33 55 4831.

Mortgage Life Insurance FAQs

 

Decreasing Term Insurance - Repayment Mortgage

Level Term Insurance - Interest Only Mortgage

Critical Illness Insurance

Common Life and Critical Illness Insurance Issues

Who can own the insurance policy ?

How long can the policy term last ?

When will the policy pay out ?

How much will be paid out ?

Are there any events when the policy would not pay out ?

How much will it cost ?

Are there any other benefits I can add to my policy ?

Can I increase the amount of benefit I receive from the policy ?

 

Decreasing Term Insurance - Repayment Mortgage


Most people who have a repayment mortgage choose to have decreasing term insurance. This is commonly called Mortgage Protection.

The idea behind decreasing term insurance is that the amount that would be paid out reduces over time, in the same way as your mortgage debt reduces. This would not be appropriate cover for somebody who has an interest only mortgage, as the mortgage debt does not decrease.

An interest only mortgage should be protected by a level term insurance policy. These policies will pay out the same amount whenever the policy holder dies.

If you are in any doubt, please call us on 020 33 55 4831.

As the benefit reduces over time, a decreasing term life insurance policy is the cheapest option to protect repayment mortgages.

At a very simple level they work in the following way :

If you die in the first year of the policy, an amount close to the full sum assured should be paid. If you die, for example, in the 10th year of the policy, part way through the term, then a reduced amount will be paid. The amount paid out will depend upon the terms of the policy.

To help ensure that the amount paid out will be sufficient to repay your mortgage, the insurers apply a "policy interest rate" to the policy. This interest rate is typically between 7% - 10%. Assuming you bought a policy that has a 7% policy interest rate then as long as mortgage interest rates do not go above 7%, the amount paid out by the policy should be sufficient to repay your mortgage in full.

If mortgage rates were to exceed 7% (in the example above) then there may be a shortfall between your mortgage debt and the amount paid out by the life insurance policy.

The policy expires at the end of the term. No claims can be made after this point. The premiums are not refunded if a claim is not made, and there is no surrender value.

These policies are ideal for protecting repayment capital and interest mortgages (not interest only). They are the cheapest form of insurance for this type of mortgage.

A decreasing term policy is used to insure the following events :

A long-term debt or loan (such as a mortgage)

To provide for children in the event of a parent dying

To protect a surviving partner from hardship should one of you die

There are many other uses as well.

The monthly premium can either be guaranteed or reviewable.

If you choose a guaranteed policy, then the monthly premium amount you initially pay will be the same for the entire life of the policy (unless you choose to increase the policy with inflation).

Choosing a reviewable policy means that after a certain period (typically 5 or 10 years) the insurance company will review the policy to see if they can still offer the cover at the same price. At this point they may alter the monthly premium. The policy will be reviewed on a regular basis.

Reviewable policies are typically cheaper at the start of the policy than guaranteed policies.

Platinum Financial are happy to provide quotes for both types of policy.

It is important to note that if you do not answer any question on the insurer's application form truthfully, you could run the risk on invalidating any claim you may make.

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Level Term Insurance - Interest Only Mortgage


Level term insurance means that the benefit that will be paid out by your life insurance policy will remain constant or level throughout the term.

This is therefore an ideal policy to repay an interest only mortgage.

As the amount owed on an interest only mortgage does not decrease over the term of the mortgage, you will require a policy that will pay out the full mortgage debt whether you die in the first year of holding the policy, the last year, or anywhere else in between.

The policy expires at the end of the term. No claims can be made after this point. The premiums are not refunded if a claim is not made, and there is no surrender value.

The monthly premium can either be guaranteed or reviewable.

If you choose a guaranteed policy, then the monthly premium amount you initially pay will be the same for the entire life of the policy (unless you choose to increase the policy with inflation).

Choosing a reviewable policy means that after a certain period (typically 5 or 10 years) the insurance company will review the policy to see if they can still offer the cover at the same price. At this point they may alter the monthly premium. The policy will be reviewed on a regular basis.

Reviewable policies are typically cheaper at the start of the policy than guaranteed policies.

Platinum Financial are happy to provide quotes for both types of policy.

It is important to note that if you do not answer any question on the insurer's application form truthfully, you could run the risk on invalidating any claim you may make.

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Critical Illness Insurance


Many people will make sure that their mortgage is protected if they die, but considerably fewer actually protect themselves should they suffer a major illness and live!

If losing your health also means you lose your home, then knowing that your family would have been protected if you had died, will be of little comfort.

Whilst both critical illness and life insurance are equally important, it is worth considering that if you are under 65 and can only afford one type of insurance, you are four times more likely to suffer a critical illness than die.

Mortgage Critical Illness insurance has the following benefits :

It will pay out the sum assured on the diagnosis of a critical illness

The amount paid out can reduce as your mortgage debt reduces

You can insure yourself for more than your mortgage amount to help pay any additional costs

You can add other benefits to the policy, thereby making your overall cost of insurance cheaper

Think how your life would be if you had to give up your home. Imagine having to live somewhere that is not of the same standard to the home you are currently in. Think of the difficulties of moving. And then imagine all of the above and having it happen at the very moment when you become disabled or seriously ill. That is the risk that millions of home-owners currently face.

More and more people have realised that they need to protect themselves and their property, and sales of critical illness insurance have increased.

This is good news for policy-holders as insurance companies are now actively looking at the illnesses and disabilities covered, as well as competing on price.

Depending on your pocket, you can buy critical illness and disability insurance in a number of formats. Both level and decreasing term policies are available.

These policies exist to help you when you have an illness that is going to have a major impact upon your life.

However some conditions are not covered, even though being diagnosed with the condition may be traumatic. The most obvious examples are some forms of cancer.

Fortunately, due to medical advances, some cancers are now treatable and therefore these cancers will be excluded on most providers' policies. It is important to stress that the more serious cancers are still included.

Whilst there may be a few variations between providers on the conditions covered, most reputable insurers create their lists in line with those illnesses considered critical by the medical profession and The Association of British Insurers.

If you are diagnosed with a critical illness, then a claim should be made.

Some insurers will pay out immediately, others may require you to survive for a period after the onset of the first symptoms. This is typically for a period of 30 days.

Many insurers will also include terminal illness benefit in the policy. This will pay the sum assured if you are diagnosed with a terminal illness with a life expectancy of less than 12 months (irrespective of whether it is on the critical illness list or not).

Below is a typical list of conditions covered by most critical illness policies, however it is not a definitive list. If you are keen to make sure a specified condition is covered, then please make us aware. Also just because a disease is not on our list does not mean that cover cannot be obtained. For example, some insurers cover Creutzfeldt-Jacob Disease (CJD commonly known as Mad Cow disease) - we have not included it in our list below because many insurers do not cover it.

Alzheimer's Disease
Aorta Graft Surgery
Aplastic Anaemia
Bacterial Meningitis
Benign Brain Tumour
Blindness
Cancer (normally malignant types only)
Cardiomyopathy
Chronic Lung Disease
Coma
Coronary Artery By-Pass Surgery
Deafness
Dementia
End Stage Kidney Failure
End Stage Liver Failure
Heart Attack
Heart Valve Replacement or Repair
HIV/AIDS (some exclusions)
HIV/AIDS Blood Transfusion
Loss of Limbs
Loss of Speech
Major Organ Transplant
Motor Neurone Disease
Multiple Sclerosis
Paralysis
Parkinson's Disease
Progressive Supranuclear Palsy
Stroke
Third Degree Burns
Total and Permanent Disability

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Common Life and Critical Illness Insurance Issues


Each insurance provider will have their own terms and conditions. Platinum Financial Consulting deal with all the leading providers in the UK.

The information we provide below is therefore not necessarily the terms and conditions you will be offered. They are simply a generic outline of the conditions offered by most providers, and are provided as a guide to better aid your understanding.

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Who can own the insurance policy ?


Most people who own an insurance policy are also the individuals who are insured on the policy. However it is possible to own a policy on anybody in whom you have an "insurable interest". This means that if your life or finances would be directly affected should something major happen to somebody you are involved with, then you can take out a policy on them.
Obvious examples are:


Husbands, wives and partners
Business partners
Parents
Key employees

Policies can either be owned singularly or jointly.

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How long can the policy term last ?


The term of a policy could be anything from 1 year up to about 40 years.

The maximum term offered by the insurer may reduce depending upon the age of the insured person. Most providers tend not to offer a term beyond the age of 85.

If you choose a term of 1-5 years, you may lose some benefits. The obvious example would be a life insurance policy where terminal illness benefit may be withdrawn. Terminal illness benefit would normally pay on the diagnosis of a terminal illness. However, the policy would still pay out on the death of the person insured.

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When will the policy pay out ?


The policy will pay out if the insurable event occurs during the term of the policy. This means that if you insured yourself against critical illness and you suffered a heart attack during the term of the policy, then the policy would pay out.

The policy will normally cease at this point, once a claim has been made. This is typically the case even if you have several events insured in one policy, for example a husband and wife insuring each other against death or critical illness.

It is possible however to buy a policy that would continue to offer insurance even if a claim against it has already been made.

Platinum are able to provide all types of policy; please talk to us if you are in any way uncertain.

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How much will be paid out ?


A decreasing term policy gets its name from the fact that the sum assured gradually reduces over the term of the policy.

Whilst at first you may wonder why anybody would want such a policy, if you consider that if you are using the policy to protect a debt like a repayment mortgage, you will realise that the amount you owe your mortgage lender will also reduce over the years.

This therefore makes these policies suited to any situation where the actual amount you require to be paid out will reduce over time.

When a decreasing policy is used to protect a mortgage or other liability, the policy has a built-in interest rate associated with it. These interest rates are typically 7% - 10%, but it is possible to get providers to quote using different interest rates.

The sum assured therefore reduces based on an assumption that you are paying an interest rate of 10% on your mortgage. As long as interest rates do not go above 10%, then in the event of a claim there should be at least enough money to repay your mortgage.

It should be noted that if interest rates went above 10% for a considerable period of time, then in the event of a claim you may not receive all the money you need to repay your mortgage.

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Are there any events when the policy would not pay out ?


Life insurance policies are relatively straightforward contracts. Therefore most of the things that could stop the policy paying out are in the hands of the applicant.

The policy would not pay out if:

it was discovered that you were not truthful with all the information you provided either at the time of application or claim;

if you stop paying the premiums or your premiums are in arrears;

if it was considered you were in any way culpable for bringing on the insurable event.

Suicide may not be covered by many life insurance companies.

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How much will it cost ?


Most insurance quotes are given based on standard rates. This means that the premium quoted will be based upon obvious factors such as your sex, age, occupation and whether you smoke or not. Because the quote is not based upon any medical underwriting, it cannot be guaranteed.

On application, the insurance company will fully assess your application including any medical reports or tests as necessary.

Once the policy has been underwritten, the insurance company will issue formal terms to you, including the monthly premium. Whether the premium remains the same during the term of the policy will depend on whether you have selected a guaranteed or reviewable policy.

A guaranteed premium is exactly what you would expect, namely the premium will be the same throughout the life of the policy.

A reviewable policy will start out with an initial premium (normally cheaper than the guaranteed premium), but after a certain period the insurance company will review the policy. At this point they could adjust the premium you are required to pay.

If you want to protect the policy against the impacts of inflation, or have other reasons to gradually increase the value of the policy, you could choose to “index” the policy. This means that each year the benefit will increase in line with a known index, such as the Retail Price Index (RPI) or an agreed percentage. With an indexed policy both the benefit and the premium will increase year on year. There will be other charges for administration and running of the policy. These are included in the monthly premium. You will be able to see details of these charges in the illustration we provide to you.

The insurance company will also pay Platinum Financial Consulting a commission for introducing the business and providing you with advice. We are keen to stress that this does not make it more expensive for you to deal with us, in fact as recognised independent financial advisers some insurance providers give us preferential rates.

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Are there any other benefits I can add to my policy ?


Most life insurance policies will allow you to add several benefits to your policy. Obvious examples are Life and Critical Illness insurance. There are however some additional benefits offered by some providers that may be of interest to you:

Waiver of Premium
This benefit will continue to pay the premiums on the policy should you be in a position where you are unable to work due to accident or sickness for a defined period (typically 6 months). The premiums will continue to be paid for you until you recover, or the policy term lapses, or you reach a specified age, typically 60.

Conversion Option
This will give you the possibility to convert the policy to a whole of life policy without further underwriting. This could be a benefit to you as you get older and find premiums more affordable for the longer term, or as your needs change, or if you discover that you can no longer obtain term insurance and want to ensure you have some cover for life.

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Can I increase the amount of benefit I receive from the policy ?


The sum assured is set and underwritten at the outset of the policy. If you decide that you simply want to increase the level of cover for personal reasons, it may be difficult to do so using your existing policy without further underwriting.

Many insurance providers will allow you to increase the level of cover without underwriting if certain events occur in your life. This is known as a “Guaranteed Increase / Insured Option”. The increase will be restricted to certain limits, but it will nevertheless give you the increased cover you require.

Typical events are :

Marriage
Becoming a parent or having another child
Moving home

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* The Office for National Statistics

 

These notes are intended as a guide only.

Upon application we will make sure we are aware of your requirements, and inform you of the terms and conditions of the selected provider, before the policy comes into force.

If you think these notes are incomplete or misleading in any way, please contact us immediately.

 
     
Life Insurance Help Contact Details
 
Platinum Financial Consulting
The Old School House, East End Road
Bradwell-on-Sea, Essex, CM0 7PY


Telephone : 020 33 55 4831               Fax : 0871 277 1422          Email : help@platinumifa.co.uk

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FCA Registration Number : 227014

 
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