Decreasing term life insurance (to cover mortgage)

silvertree

I am just reviewing our life insurance policy and am trying to work out what would happen with a decreasing term life insurance if you made overpayments on your mortgage.

For example, at the beginning of the term you took out £200,000 of cover and ten years later you needed to claim on the policy, how would they work out how much to pay you?

More specifically, if we have made overpayments each month on our mortgage, what would happen to these overpayments? Would we only receive the remaining money due to clear the mortgage, or would we receive this amount plus the overpayments we had made?

I hope this makes sense, I just wonder if we made a load of overpayments over the years would this just end up reducing the level of cover we would get?

Thanks!

InsideInsurance

With most products the method of calculation is described in the policy and so overpayments are not factored in. If you claimed after making overpayments you would receive a settlement that is greater than the outstanding value of your mortgage.

It would be up to you if you are happy to have this extra coverage or want to cancel the policy and buy again with a lower sum insured.

kingstreet

I agree with II.

The policy would normally contain an interest rate schedule which sets the capital reductions for the term of the policy.

If you pay the mortgage off faster, on death less of the benefit would be used for mortgage repayment, so more could be used for something else, perhaps family protection.

It's worth remembering, it may be called mortgage protection assurance, but it's upto the beneficiaries if they do pay off the mortgage with the money. It can be used as they see fit.

silvertree

Thanks very much for your replies, thats really helpful. It doesnt seem to indicate anything in the quotes, but obviously I suppose you would know once you proceeded with the policy.

Thanks for your help - its a minefield out there!

kingstreet

When you do a quote, you are normally asked the interest rate schedule you'd like for MPA/DTA. I use 9%.

Some insurers may have a set level and this will be shown in the quotation assumptions.

Even though this is a mortgage protection plan, you should still consider writing it in trust to avoid the need for probate and to prevent it adding tot he estate for inheritance tax purposes.

If written jointly, this has the same effect.