Good advice / bad advice?

breakingbad

Morning all,

My wife and I bought a house 5 years ago. At that time, we sought independent advice and were advised to take out out separate life insurance policies, each for a flat (non-decreasing) £200k. We were also advised to take out income protection policies. In the end, my wife took out an income protection policy of £1300/mth, and I took out £100k of critical illness cover (I was refused income protection due to some pre-existing medical conditions).

All in all, this left me paying £42/mth and my wife paying £36/mth.


Fast forward to 2019, and we've just bought a house. The mortgage amount owing is £230k, and so our mortgage adviser said we should update our life protection policies. He advised us to ditch my wife's income protection policy, and both of us take out critical illness cover, as well as increased life cover.

So, quotes for separate policies for £230k of life and critical illness cover (but this time DECREASING in terms with the mortgage) is approx £69 each.

What would you do? Personally, I think £200k of non-decreasing cover is more beneficial? But then there is the higher critical illness. Hmmm

Thanks,

Gareth

Weighty1

The adviser SHOULD recommend decreasing cover for a repayment mortgage as that is the most appropriate type of cover to repay a repayment mortgage.

Personally, I wouldn't recommend anyone to cancel a long term income protection plan BUT without knowing what the future holds it's impossible to say which is better.

If your wife had a heart attack she might only be off work a couple of months and could have a big lump sum paid out with little loss of income. Conversely, she could develop a condition which isn't claimable under a critical illness plan but which prevents her from working for years.

I'd also not recommend single life policies. This is ALWAYS more expensive than a joint policy and a mortgage can only ever be repaid once so a joint plan *should* be the recommendation made.

dunstonh

He advised us to ditch my wife's income protection policy, and both of us take out critical illness cover, as well as increased life cover.

That has alarm bells ringing. PHI (income protection) is more important than CIC. CIC will pay a lump sum on diagnosis of a limited range of critical illnesses. PHI is not illness specific. It is about an inability to work.

Is the mortgage adviser independent in all areas (this is important as many whole of market brokers are tied to one or a panel of insurers. L&G being a major tied agent in this area). Many mortgage brokers do not have an income protection policy available. Or they have a really rubbish version.


Nobody here can give you advice or assess your financial needs. However, being told to cancel income protection in favour of CIC would put me on guard. If it was a naff income protection (and they do exist) then changing it to a better income protection would be order of the day. Not removing the whole coverage.

Decreasing term assurance is normal for a repayment mortgage. However, there are scenarios where level term assurance can make sense. Indeed, for myself, I bought a joint level term assurance as it gave me the effect of annually increasing my family protection (for inflation) that tied in with my financial needs. The dates all fitted nicely.

Joint policies are the norm on mortgage cover (but not necessarily family cover). Although unmarried couples, at the point of taking them out, may prefer to do single life policies. Family protection will often have sole policies.

tacpot12

I used level term insurance to cover my mortgage as I thought it offered better value that the decreasing term policies I was being offered.

According to your original post, you have £400K of life cover, in two separate policies, and your wife has income protection so she wouldn't need any more life insurance as your £200K policy will clear all but £30K of the mortgage and she has income to do that.

You might need to add £30K of life cover, but you can arrange this for a lot less that the quote from the mortgage broker. I would use an insurance broker to buy the insurance you need. Just get confirmation from the mortgage broker or the mortgage company as to how much life cover you actually need. They might not have any requirement for you, and you might try suggesting to them that any death-in-service benefit to which you might be entitled to from your employer would provide any additional protection they need.

Your wife should definitely not cancel her PHI.

breakingbad

Weighty1 wrote: »

I'd also not recommend single life policies. This is ALWAYS more expensive than a joint policy and a mortgage can only ever be repaid once so a joint plan *should* be the recommendation made.

However, with a joint policy, if something happened to me and I died, the policy would pay out and cover the mortgage, but would then leave my wife unprotected? I think this is the reason for us going for separate policies.

breakingbad

tacpot12 wrote: »

According to your original post, you have £400K of life cover, in two separate policies, and your wife has income protection so she wouldn't need any more life insurance as your £200K policy will clear all but £30K of the mortgage and she has income to do that.

You might need to add £30K of life cover, but you can arrange this for a lot less that the quote from the mortgage broker. I would use an insurance broker to buy the insurance you need. Just get confirmation from the mortgage broker or the mortgage company as to how much life cover you actually need. They might not have any requirement for you, and you might try suggesting to them that any death-in-service benefit to which you might be entitled to from your employer would provide any additional protection they need.

Your wife should definitely not cancel her PHI.

Yes, I agree that the remaining £30k on the mortgage shouldn't be a limiting factor for her, if I were to die.

Also, am I incorrect in thinking that, were I to have a major heart attack and die, that the critical illness cover AND the life insurance cover would both pay out, therefore providing her with £300k? I am sure they are separate policies.

Also, as you mention,both my wife and I received 3x annual salary as an in-service death benefit. For me this would be almost ~£150k, for her ~£100k.

EDIT: Just checked, yes they are separate policies with the same insurer, so the current policies would pay out a total of £300k on my death, or £100k for critical illness, then £200k on death, both level term and lasting until 2047.

dunstonh

breakingbad wrote: »

However, with a joint policy, if something happened to me and I died, the policy would pay out and cover the mortgage, but would then leave my wife unprotected? I think this is the reason for us going for separate policies.

Correct. However, if you are "packaging" solutions to fit different needs then you would have a segment that is joint life for the mortgage and then a single life segment for any family protection or other needs. (noting that we could discuss a whole load of scenarios where different methods achieve the goals).

Weighty1

For most critical illness plans there is a survival period, often 14-days. This means if you had a heart attack and died immediately or within 14-days your family wouldn't get the critical illness payout, only the life insurance one.

Just something which is worth checking.

breakingbad

Weighty1 wrote: »

For most critical illness plans there is a survival period, often 14-days. This means if you had a heart attack and died immediately or within 14-days your family wouldn't get the critical illness payout, only the life insurance one.

Just something which is worth checking.

Thanks for the heads up. Just looked at the documents again, the wording for the £100k "Life with critical illness" policy is:
"This benefit will be payable if, before 1st March 2047, Mr X:
- dies
- is diagnosed as having a defined critical illness and lives beyond the survival period"

So it looks like it pays out either way?