Life Insurance Questions

Chris94

So I recently bought a home through a Scottish government first time buyers scheme called "Lift" where I get a mortgage for 60% of the property and they pay the remaining 40% and I can purchase equity back from them. The catch is they get whatever share of equity they have when I come to sell it as a percentage of the sale price.

Anyhow, there was so much stuff going on with applications, the move, etc. I just nodded my head to everything my mortgage advisor said, and now I've realised I've got what seems to be two different life insurance policies.

One is "Decreasing Term Assurance with Critical Illness" (for the 60% which is my equity) and the other is "Term Assurance with Critical Illness" (to cover the government funds which was 40% of the equity). This makes sense, because I'm paying the mortgage off but not the government equity.

However, for the first I am paying £12.38 per month and the second £12.67. Which is strange, because I am paying more for insurance on a lesser amount of funds.

Does anyone have knowledge of this sort of thing, before I email my mortgage advisor yet again, seeming clueless? Can I not just pay for insurance to cover my 60% and the government's 40% of funds in one policy? Would this not result in a lower cost? Why might the second policy cost more?

paddyandstumpy

In simple terms the decreasing cover policy will reduce the cover monthly, in line with your outstanding mortgage value.
Whereas the term policy is fixed value.

tacpot12

i find the bundling of the critical
Illness insurance slightly odd, so I'm curious as to how much the mortgage is for and how much crucial illness insurance cover you have bought?

HappyHarry

Chris94 wrote: »

So I recently bought a home through a Scottish government first time buyers scheme called "Lift" where I get a mortgage for 60% of the property and they pay the remaining 40% and I can purchase equity back from them. The catch is they get whatever share of equity they have when I come to sell it as a percentage of the sale price.

Anyhow, there was so much stuff going on with applications, the move, etc. I just nodded my head to everything my mortgage advisor said, and now I've realised I've got what seems to be two different life insurance policies.

One is "Decreasing Term Assurance with Critical Illness" (for the 60% which is my equity) and the other is "Term Assurance with Critical Illness" (to cover the government funds which was 40% of the equity). This makes sense, because I'm paying the mortgage off but not the government equity.

However, for the first I am paying £12.38 per month and the second £12.67. Which is strange, because I am paying more for insurance on a lesser amount of funds.

Does anyone have knowledge of this sort of thing, before I email my mortgage advisor yet again, seeming clueless? Can I not just pay for insurance to cover my 60% and the government's 40% of funds in one policy? Would this not result in a lower cost? Why might the second policy cost more?

This doesn't sound strange at all.

As you don't give figures, let's assume the value is £100,000 in total.

You are getting a level term policy covering you in the event of death or critical illness for £12.67 per month. If there is a claim made at any point during the term of the policy, then the policy would look to pay out a fixed amount of £40,000.

You are also getting a decreasing term policy covering you in the event of death or critical illness for £12.38 per month. If there is a claim made right at the start of the policy, then the policy would look to pay out £60,000. However, as time progresses, the amount that the policy pays out decreases. e.g. if a claim was made in ten years' time, then the policy might only pay out £30,000. Hence, at that time the possible liability to the insurance company is less.

The reason for this decreasing policy is that you are covering a repayment mortgage. As time goes by, the amount you owe the lender decreases, as the mortgage payments you make cover the interest and some of the capital. If you die after ten years, the debt will not be £60,000, it will be far less. The decreasing term policy should cover the amount outstanding, at the point of claiming.

You could have a level term policy for £100,000. In the event of a claim during the policy term, then £100,000 would look to be paid out. This would cover the debt and would provide extra funds too. The later on the claim is, the lower the debt, and the more extra funds a £100,000 policy would then provide.

The cost of policies is roughly linear, so a £100,000 level term policy would likely cost in the region of £31 per month.

As a further consideration, do you have enough protection. If you have the mortgage covered, what about other expenditure such as council tax, electricity, gas, food, travel and so on? You may want to consider a proper income protection plan.

Do you have anyone else dependant on your income? If so further protection may be essential, so those dependants aren't left in a paid for house but with no means of further financial support.

Chris94

I assumed with the decreasing illness cover then the cost of the policy would reduce alongside the remaining mortgage as it is paid off. Would this not be the case?

HappyHarry

Chris94 wrote: »

I assumed with the decreasing illness cover then the cost of the policy would reduce alongside the remaining mortgage as it is paid off. Would this not be the case?

No, your premiums stay fixed.

The way it works is that you get very good value for money in the early years and less so in the later years (if your health remains good).