Decreasing Term Life Cover - What term?

maxxy

I am looking to change my decreasing term life and critical illness cover as my circumstances have changed.

Since taking out my original cover for 28 years, I have started overpaying on my mortgage. If I continue at the current rate, this should decrease my mortgage term from 28 years to about 15 years.

Over what period should I take out my decreasing term cover? If I take it out over 15 years it will be cheaper per month than over 28 years. If I take it out over 28 years and pay it off early, presumably I can then just cancel the cover.

Presumably if I stop making overpayments in future I will have to change my policy, but are there any potential drawbacks with doing this? Will my mortgage company have any issues with this?

The difference between 28 year and 15 year term payments is approximately £11 per month so if I carried on making overpayments to my mortgage (which I plan to) I would have paid approximately £2000 extra in premiums for the same cover over the 15 years. Does this sound right?

Also, I am caught as to whether there is any point getting guaranteed premiums over reviewable premiums on a decreasing term policy, as when the premium gets reviewed, surely the fact that there is a lesser amount outstanding will be taken into account, despite the fact that I will be older and presumably more likely to claim on the policy?

Any advice would be welcome as I am getting quite confused by the whole thing. My gut feel is to go for cover on a 15 year term on reviewable premiums, and accept that if I stop making overpayments I may have to review this policy again.

Thanks,

Maxxy

dunstonh

You should match the term of the debt. If you feel overpayments are likely then a yearly renewable decreasing term assurnace where you can make adjustments to the sum assured may be a more viable option for you than a decreasing term assurance.

maxxy

Thanks Dunstonh,

I do feel that overpayments are likely so I would like to cover only the 15 years. Is a yearly renewable decreasing term assurance a stand alone product or is it a standard decreasing term product with the option of reviewing it anually to determine whether the cover is suitable?

I am keen to get my decreasing term policy through Cavandish as the rates seem pretty competitive, is this something they will be able to offer or will I just be offered a standard product?

What are the risks of just taking a standard decreasing term over 15 years rather than 28 years (assuming that I carry on making overpayments)?

Also, how will the decreasing term interest rate compare with my mortgage rate? Is the policy set at a standard rate? I am concerned that the policy will decrease in value at a faster rate than my mortgage leaving me exposed towards the end of the policy. I am not sure if this is a major concern though, as by that point presumably the mortgage will be significantly smaller.

Thanks,

Maxxy

dunstonh

I do feel that overpayments are likely so I would like to cover only the 15 years. Is a yearly renewable decreasing term assurance a stand alone product or is it a standard decreasing term product with the option of reviewing it anually to determine whether the cover is suitable?

As long as it has reviewable sum assured you will be fine with the annual review.

I am keen to get my decreasing term policy through Cavandish as the rates seem pretty competitive, is this something they will be able to offer or will I just be offered a standard product?

Cavendish work on a limited panel. I know on pensions that they can be beaten (even on full commission basis) but on life cover they are very good. I dont know what life assurance options Cavendish offer so it will be a case of you looking and finding out.

What are the risks of just taking a standard decreasing term over 15 years rather than 28 years (assuming that I carry on making overpayments)?

None. The risk is if you dont make overpayments. Remember that overpaying a mortgage is not necessarily the best option. You should utilise ISA allowances first as the long term benefit is far better than repaying the mortgage (ISA is a use it or lose it allowance that you can never get back).

Also, how will the decreasing term interest rate compare with my mortgage rate? Is the policy set at a standard rate? I am concerned that the policy will decrease in value at a faster rate than my mortgage leaving me exposed towards the end of the policy. I am not sure if this is a major concern though, as by that point presumably the mortgage will be significantly smaller.

If the decreasing term assurance doesnt match the term of the mortgage than you can forget about any guarantee the provider offers to repay the mortgage even if it doesnt quite match up. You will find it very hard to keep the sum assured matched if you make overpayments unless you make manual adjustments each year (hence why a yearly renewable term assurance with adjustable sum assured would be better - and also written to the 28 year term).

maxxy

Thank you for your views dunstonh.

I will investigate a yearly renewable term assurance with adjustable sum assured.

I am aware of the argument for ISA saving vs mortgage overpayments and in the past I have sat on the fence and wavered between the two options. I am now at a stage where I would like to concentrate on getting my mortage down as I am concerned that I will be close to negative equity in the current market unless I overpay. I am aware that from a purely fianacial point of view it may not be the best option.

Out of interest, from a purely financial view what do you think I would be better off doing given that my wife and I are currently overpaying about £4000 per year on our £140000 mortgage at 5.49% (fixed until July 2012).

Thanks for the help.

Maxxy