Decreasing mortgage insurance...

Sponge

I'm in the process of remortgaging (end of fixed rate deal) and have moved from an interest only to repayment mortgage. It's now over 25 years and for £100,000.

Our old insurance was level cover, with CI and reviewable, but as we're now on repayment I'm thinking we should swap to a decreasing scheme, with guaranteed premiums. Is this a good idea?

After searching this forum, I'm also thinking we should lose the CI part and simply protect the mortgage part. Then investigate some form of income insurance instead. Now we have children, I want something in place to help them should we not be able to provide for them. Is this a good idea too?

Furthermore, we plan to move house in a couple of years (sooner if possible, see how we manage after child #2 is born) which will no doubt involve an increase in our mortgage. Our mortgage advisor suggested insurance on our mortgage shouldn't be chopped and changed (we've been changing it every couple of years when we renew our mortgage), and that we should find a scheme and stick with it. Reason being we're getting older, could develop illnesses, and hence risk and cost increase. Is this right?

If so, would it be an idea to take out a decreasing insurance policy but at a higher initial level as we plan to increase our mortgage in a few years? This would mean we wouldn't have to take out a new policy when we move, as the one we put in place now will cover us in the future? E.g. instead of a £100k decreasing product, get a £150k one? (More than current mortgage, but should be enough to cover the new mortgage.)

(Me = 34, wife = 31, non-smokers, healthy, 1 child of 20 months, second due in March '08.)

homer_j_3

Sponge wrote: »

I'm in the process of remortgaging (end of fixed rate deal) and have moved from an interest only to repayment mortgage. It's now over 25 years and for £100,000.

Our old insurance was level term + CI, reviewable, but as we're now on repayment I'm thinking we should swap to a decreasing scheme. Is this a good idea?

Decreasing term will normally be the cheapest option for you on a repayment mortgage. Level term could provide a bit of extra cover for yor dependents should a claim be made.

Without knowing your full circumstances, it is not possible to say whether its a good idea or not. I would seek professional advice.

After searching this forum, I'm also thinking we should lose the CI part and simply protect the mortgage part. Then investigate some form of income insurance instead. Is this a good idea too?

Well Critical Ilness does a completely different job and is designed to still protect the mortgage part. In fact listening to a representative of one of the larger insurance companies they quoted the fact that you are 4 times as likely to be diagnosed with a critical illness than you are to die before your mortgage ends.

Also if you drop it now with a view to pick it back up later, you may lose some illnesses that you are covered with now so it can mean that the cover gives you less for your money.

Once again, I do not know your circumstances well enough to say whether you should drop or not.

I would ssek professional advice.

Furthmore, we plan to move house in a couple of years (sooner if possible, see how we manage after child #2 is born) which will no doubt involve an increase in our mortgage. Our mortgage advisor suggested insurance on our mortgage shouldn't be chopped and changed (we've been changing it every couple of years when we renew our mortgage), and that we should find a scheme and stick with it. Reason being we're getting older, could develop illnesses, and hence risk and cost increase. Is this right?

Yes to a degree. If everybody took out the most lifecover and critical illness that they could when they were 18, it would be far cheaper as you could guarantee the rates when you are more likely to be healthy. Cover is determined by age, health etc. When you get older, cover does get cheaper and as I have mentioned before, you can sometime lose the level of cover as they change what illnesses can be covered.

With the fact that you have children, some critical illness cover will have free child cover which means that should you have to take a prolonged time off work for your child then you can ease the financial burden.

Before any adviser changes your cover they should fully understand and be able to explain why the newer policy is better than the older and confirm any downsides to that policy over the previous if any. Rule of thumb is that if its not like for like as a minimum and cheaper then you should keep that policy in place. If more cover is required then just top up rather than replace.

If so, would it be an idea to take out a decreasing insurance policy but at a higher initial level as we plan to increase our mortgage in a few years. This would mean we wouldn't have to take out a new policy when we move, as the one we put in place now will cover us? E.g. instead of a £100k decreasing product, get a £150k one? (More than current mortgage, but will be enough to cover the new mortgage.)

(Me = 35, wife = 31, non-smokers, healthy, 1 child of 20 months, second due in March '08.)

This cannot really be answered as we do not know your current policy details or the details of the one that will be replacing it. I dont think the above would work on face value because the cover will potentially decrease at a faster rate than your next mortgage and there are too many variables involved.

If I was to look at this as a generic question and assume that there was nothing behind the scenes that could trip me up, I would have probably said, get as much level term life cover as you can for as long as you can with CI built in on guaranteed terms. I would have then suggested some form of income protection to kick in after your sick pay ends and then have some unemployment cover too.

The level term stays the same and providing you finish your mortgage before this cover ends, you pretty much cover every eventuality (other than exceeding the cover amount). CI is guaranteed for this amount at todays rate and as you have topped up, you keep the old cover in there too.

It all depends on your budget though at the end of the day and if there were kids involved, I would ensure that you protect them as much as you can. Losing an income will be more likely than dying during the mortgage. CI will be more likely than dying. Losing a job will be more likely too - yet we look at the cheapest option and just look to cover the cheapest. Its cheaper because its less likely to pay out.

Anyway I hope I have gone someway to answering your question.

dunstonh

In fact listening to a representative of one of the larger insurance companies they quoted the fact that you are 4 times as likely to be diagnosed with a critical illness than you are to die before your mortgage ends.

That matches my experience on claims as well. I cannot remember the last life assurance claim for someone with a mortgage but I get a couple of CI claims going through each year.

Sponge

Thank you both for taking the time to reply. I understand you're unable to offer advice, or specific guidance on my situation (as you don't have all the facts), but the general guidance you have provided has been just what I'm looking for and a great help. :beer:

I do have a few more questions though:

You mentioned my consideration of dropping CI in any new policy. If the policy I took out 2 years ago has better coverage in this respect (something I'd need to check), then in order to keep that increased cover I'd need to keep the current policy going and simply take out a new one to increase my total coverage. Yes? (Assuming I can get hold of the T&Cs of any new policy that is being considered, to make the comparison.)

You say statistics show that a claim under CI is more likely than death, but are they successful? My understanding of the guidance given on the front pages of MSE is that the T&Cs of CI policies are so specific that claims are often rejected. (A relative of mine recently fell foul of this.) It was why I was considering ditching the CI.

I'm not a big fan of critical illness policies. Many believe they will "pay out if you get a serious illness and can't work". Yet that isn't true, critical illness policies pay out a lump sum if you get a specific critical illness as defined by the terms of the policy, which can often be changed; for example losing one leg isn't critical, but two legs is! So don't think "I'm covered for cancer", most policies only cover a limited range of cancers.

Picking a good critical illness policy would take a doctor and financial nerd combined; so I suggest you're better off getting the level term cover and an income protection policy - which does just that - protect your income from a range of eventualities.

I've also read forum posts suggesting CI cover is further down the list of 'must haves', i.e. Life Cover, Income Protection, CI. Have I misunderstood this?

Finally, for now ,decreasing policies: Are they 'hard-linked' to the mortgage? Therefore always decreasing at the same rate as the mortgage? So if I make a lump sum mortgage payment, say £10k, will the insurance policy automatically decrease by this amount (or thereabouts) too? I ask because it is our intention to make a lump sum payment of £10k within the first year of remortgaging and another the year after (the most we can do without penality).

PS I've just realised this discussion isn't really in the best place. Mods, please feel free to move it.

dunstonh

My understanding of the guidance given on the front pages of MSE is that the T&Cs of CI policies are so specific that claims are often rejected.

You have to read that very carefully. Most providers pay out in around 80% of all claims. Around 5% are due to non-disclosure (where people have told porkies on their application) and around 10-15% are because the claim is not something that is covered on the policy. Obviously it varies with providers but the figures published on claims rates are around those areas.

So, 4 out of 5 claims are paid out successfully.

I've also read forum posts suggesting CI cover is further down the list of 'must haves', i.e. Life Cover, Income Protection, CI. Have I misunderstood this?

Life cover is top of the pile followed by permanent health insurance then critical illness cover. PHI gives you wider coverage for long term illness as it isn't specific to critical illnesses. Although a good example was posted in the insurance forum the other day where someone was paid out on their CI policy but not on a PHI policy as the critical illness did not prevent them from working.

Finally, for now ,decreasing policies: Are they 'hard-linked' to the mortgage? Therefore always decreasing at the same rate as the mortgage?

No, there is no link at all between the mortgage balance and the sum assured.

homer_j_3

I thought decreasing term policies were linked to an assumed interest rate of 10-12% so only if your mortgage rate is higher than this should you be in a sticky problem.

I think it is difficult to put an order of priority as a single person with no dependents type client would have life cover further down the list to say PHI and CI cover etc.

Claims are paid out for "specified" illnesses and these will be detailed in your policy and key facts document. If its not one of those illnesses then it will not pay out. Its like having a 2k tv and only having items upto 1k covered on your policy. It wouldnt pay out 2k.

As Dunston has clearly said, where a claim is made on a specified illness then it is not something that the insurance company will be able to wriggle its way out of unless you have not fully disclosed some information at the application stage which would have meant that you would never have got that cover for that price at the start of the application. This is why we constantly bang on about using a professional to get protection rather than use tesco.

You need to ensure that the cover you are getting will do the job you want it to do - not waste money each month paying for something that may never pay out.

You will see a lot of bad press on insurers not paying out on the odd claim but I have never seen any reporter explain why it didn't pay out. Pain of others sell papers and get viewing figures.

Getting a lung cancer victim on TV and say "well if you had only disclosed the fact that you had smoked 40 a day rather than the 2 you stated, then it would have paid out" I apologise if this has been a stereotypical example and I do not want to upset anybody that has lost people in this way but I am just trying to say that the perception of these insurances are driven by what you read and see. Insurers do pay out in billions each year.

Anyway, stepping off my high horse now but it is something I am passionate about - not because of the income it provides me but because I do not ever want to have a client blame me for not making them aware of the risks and giving them the opportunity to have this protection

dunstonh

I think it is difficult to put an order of priority as a single person with no dependents type client would have life cover further down the list to say PHI and CI cover etc.

I was working on the priority list you would have before elimination. There was an old acronym that was popular years ago to help trainees. PIMPSIO. Protection, income, mortgage, pension, savings, investments, other.

Not everything applies to everyone but if you worked in that order for elimination/recommendation then you were on the right track.

You will see a lot of bad press on insurers not paying out on the odd claim but I have never seen any reporter explain why it didn't pay out. Pain of others sell papers and get viewing figures.

Watchdog were criticised heavily last time they did an anti-CI article. Twisting information from the FOS to mean something else. The FOS issued a correction a few days later but of course it was too late then and only those in the industry saw it. Not the viewers.

Sponge

dunstonh wrote: »

So, 4 out of 5 claims are paid out successfully.

I guess my MIL is the 1/5. She's now unable to work because of Chronic Arthritis, but her insurance provider won't pay out because she doesn't meet one of their several qualifying criteria for her condition. It doesn't matter that a Consultant has said that it has nothing to do with CA, the company are saying it does and have rejected her claim and subsequent appeal. She now has to sell her house.

And that's my point, how can consumers know exactly what is good cover or not? How can we evaluate T&Cs that are so restrictive that they'll be used to reject claims and potentially make the policy worthless? We can't. We can't say, well, I think I may get cancer of type A (and the qualifying criteria listed for a successful claim under that condition look reasonable to me), whereas type B (with another list) is less likely/incorrect, so I'll take this policy over that one. We're not Doctors and, with respect, neither are the FA offering us these policies.

I continually hear advice that we should compare like-with-like, which makes it sound so easy. Maybe it is if one's insuring a TV, but a life?

dunstonh

I guess my MIL is the 1/5. She's now unable to work because of Chronic Arthritis, but her insurance provider won't pay out because she doesn't meet one of their several qualifying criteria for her condition. It doesn't matter that a Consultant has said that it has nothing to do with CA, the company are saying it does and have rejected her claim and subsequent appeal. She now has to sell her house.

CI has nothing to do with ability to work. In fact, I had one client back in the 90s who had a very very mild heart attack. He didnt even realise it but it was picked up and the insurer paid out. He carried on working and only had a few weeks off work.

And that's my point, how can consumers know exactly what is good cover or not? How can we evaluate T&Cs that are so restrictive that they'll be used to reject claims and potentially make the policy worthless? We can't. We can't say, well, I think I may get cancer of type A (and the qualifying criteria listed for a successful claim under that condition look reasonable to me), whereas type B (with another list) is less likely/incorrect, so I'll take this policy over that one. We're not Doctors and, with respect, neither are the FA offering us these policies.

Its a case of knowing what you are paying for. In your mother's case, the CI policy hasnt paid out because it doesnt cover the illness. Had she taken out a PHI policy, it would have done as thats based on ability to work and isnt illness specific.

I continually hear advice that we should compare like-with-like, which makes it sound so easy. Maybe it is if one's insuring a TV, but a life?

IFAs have software (at least the better ones do) that compares the differences and you can see what is and isnt covered. Tied agents will sell you what they have as that is all they are required to do.

In reality, most people cannot afford to insure themselves fully for everything so you pick what you feel is most important. If you pick the wrong one (with hindsight) you miss out.