Replacing Endowment with Mortgage Insurance

mikeg_4

Could someone please advise?

Currently have a £100k mortgage over 20 years, £75k Repayment and £25k Interest only.

£50k is covered with 2 x £25k Decreasing Term Policies with Critical Illness cover over 20 yrs.

£27k is covered with an Endowment Policy (with no Critical Illness cover)maturing in 10 yrs with a monthly premium of £71

The remainder (£23k) is not covered by any policy.


I want to sell my Endowment Policy due to a projected shortfall and use the £71 to purchase either a new Decreasing Term policy or a Level Term policy
or both.

Do I set up a DT policy for £23k over 20yrs to cover the £23k Repayment portion, currently not covered and a LT policy for £27k over 20yrs to replace the Interest only portion?
or
Do I set up a DT policy for £50k over 20yrs or would this not be cost effective since £25k is currently Interest only?
or
Do I set up a LT policy for £50k over 20yrs?
Any advice would be greatly appreciated.

MortgageBroker_2

The choices are up to you as your lender is unlikely to stipulate that life cover is in place. Obviously, it is sensible to cover all of the mortgage, esp if you have family or dependants.

After sale of the endowment you have 50K without cover.

You could take out one DT for the 25K repayment portion not covered. However, one techincal aspect of decreasing term policies or mortgage protection plans is that if they are mortgage related then they do not decrease in a simple fashion. The polcies are designed to 'follow' the reducing balance of a mortgage. A mortgage will start to reduce slowly and then gradually increase during its term. If you take out a DT mid mortgage term then the cover will be out of sync, although this may not be by very much.

It would be simpler to take out a LTA for 50K (or whatever the exact balance is) over the remaining term. A LTA is maybe 5-10% dearer than a DT.

It is possible now to find life policies that combine different types of cover under one plan. So you could have one plan that contains LTA and DT cover for different amounts. Only one company to deal with and one DDM to pay.

It MAY be cost effective to replace all of the current polices with a new one, or two. HOWEVER, critical illness (CIC) has changed in recent years with providers changing what is covered in the small print and typically premiums are higher. So you may end up with a plan in which CIC is less comprehensive. All depends who you are with now.

NEVER, cancel any current plans before the replacement policy has been agreed and confirmed with the new company.

dunstonh

At this time, you may was well throw a PTA (pension term assurance) into the consideration list as well.

mikeg_4

Thanks
I hope you don't mind if I throw another scenario at you:

If I was to set up a DT policy for £50k over the remainder of the term say 20yrs and in 5yrs switched the £25k Interest Only portion to Repayment would this policy cover the £50k until the end of the term?

dunstonh

No it wouldnt. The mortgage is one thing, the life cover is another. The life cover would decrease year on year in line with a typical £50k, 20 year mortgage. If you alter the mortgage, the life cover doesnt get altered.

We dont know yet whether a decreasing term will be available with tax relief after April. In theory it should be allowable. It just depends on whether anyone will bring one to the market.

mikeg_4

But the mortgage amount is not changing only the method of repayment, the mortgage will still be £100k but all within a repayment scheme.
I would have 3 x DT policies totalling £100k over 20yrs.
Would this not make sense?