Life insurance / decreasing term

thriftypatos

Hi
Our broker has offered us a decreasing term life assurance policy to cover me + partner in the event one of us dies.
It's about £30 a month for £460k cover, decreasing 8% p.a. over 30yr repayment profile. We will probably just keep it in place for a few years until our equity has increased a fair bit.
What I don't understand is, the Ts & Cs say we can terminate it any point. But the broker gets paid a commission of more than £1k on day one. So what would happen if we cancelled after a few months? The underwriter would be way out of pocket as we would only have paid a few months at £30/ month. Am I missing something? Is the underwriter just assuming / taking a punt that we will leave the policy in place for years and continue to pay the monthly premium? Surely there comes a time where it no longer makes sense to pay for this cover - £30 a month for £460k of cover seems good at the outset, but it's not worth it when you only have a couple of grand left on your mortgage!

tacpot12

Have you looked at what level cover would cost, as a comparison? 
Try Post Office insurance rather use a broker to get an indicative price. 

amnblog

The Broker gets his/her commission over 24 or 48 months depending on the contract.
They can take that commission in one of two ways.
Upfront, what we call indemnity terms, in which case the commission is reduced.
Or bit by bit as the premiums are paid - what we call the drip.
If you cancel after a few months the commission stops if on the drip, or ends up as a debt on indemnity terms - what we call clawback.

Don’t take the cover if you do not intend to pay long term as that is bad news for everyone.

By the way, level cover is not appropriate to cover a repayment mortgage.

thriftypatos

Thank you. What I don't fully understand is this bit:

"Don’t take the cover if you do not intend to pay long term as that is bad news for everyone."

It's going to cost us £30 a month for (initially) £460k of cover. That decreases with time (at 8% per year), as we pay down the mortgage. But the monthly premium remains the same. So for example, in 15 years time, the value of the cover will be significantly less because we'll have paid off a considerable portion of the debt. At that point, why would we continue to pay the £30 monthly premium? We could either: (i) find a different policy with a lower premium for cover to the value of the remaining debt; or (ii) cancel on the basis that the policy's "value for money" decreases along with the cover value.

We are thinking of taking out a policy for a few years at most, just to give us comfort whilst the mortgage is big and until our death in service benefits are increased significantly (which we expect to happen in the next couple of years). 

Why is this bad news for everyone?

Thanks

dunstonh

That decreases with time (at 8% per year), as we pay down the mortgage. But the monthly premium remains the same.

The premium is effectively averaged over the term to be the same each month.       So, the decrease in cover is taken into account.

At that point, why would we continue to pay the £30 monthly premium?

A decision you can make at the time. 

We could either: (i) find a different policy with a lower premium for cover to the value of the remaining debt; or (ii) cancel on the basis that the policy's "value for money" decreases along with the cover value

a) you will be older.  So, more expensive

b) you may not be able to get cover due to health (or it may be much higher because of it)

c) cancel is always an option

We are thinking of taking out a policy for a few years at most, just to give us comfort whilst the mortgage is big and until our death in service benefits are increased significantly (which we expect to happen in the next couple of years). 

Death in service is really designed to replace short term loss of income and reduced pension benefits for the spouse.   Its not really suited to debt provision.  It can be used for whatever you like but you may well find that if the time comes, the DIS benefit is not sufficient by itself.

thriftypatos

That's clear and helpful, thank you.

thriftypatos

Ok, so one more question if that's ok.

We are taking out a 30yr mortgage so the obvious thing to do is align the decreasing term life cover to match that. However, we fully expect to overpay and shorten the term of the mortgage in the future. If we're confident of doing that, it seems silly to sign up to a 30yr life assurance policy when we could, for example, take out cover for 20yrs and save ourselves a few grand in premia?