Life policy on mortgage

Pat38493

Hey all - I am currently paying each month about £48 for a protection policy that I believe was designed to pay off our mortgage in the case of one or other of us passing away before the mortgage is paid off.

The balance on the mortgage is obviously a lot less than it was at the beginning, and also we paid off about half the outstanding balance from a cash lump sum earlier this year.  The current remaining balance is £108000

As such, I suspect it doesn't make sense to being paying £48 per month to protect that (and come to think of it I'm not really clear why I had to pay the same amount every year if the amount to be paid off by the policy was getting less and less each year).

I'm guessing that if I cancel that policy and get a new one to protect the remaining balance for the remaining 10 years of the mortgage it will cost a lot less?

dunstonh

As such, I suspect it doesn't make sense to being paying £48 per month to protect that (and come to think of it I'm not really clear why I had to pay the same amount every year if the amount to be paid off by the policy was getting less and less each year).

The premium was set as an average over the term.   Hence why it didnt change.

I'm guessing that if I cancel that policy and get a new one to protect the remaining balance for the remaining 10 years of the mortgage it will cost a lot less?

Possibly.  Possibly not.   It depends on your age, health and when you originally bought the policy.  Life assurance is cheaper when you are young and at various points life assurance has been more expensive or cheaper than today.

DullGreyGuy

Pat38493 said:

Hey all - I am currently paying each month about £48 for a protection policy that I believe was designed to pay off our mortgage in the case of one or other of us passing away before the mortgage is paid off.

The balance on the mortgage is obviously a lot less than it was at the beginning, and also we paid off about half the outstanding balance from a cash lump sum earlier this year.  The current remaining balance is £108000

As such, I suspect it doesn't make sense to being paying £48 per month to protect that (and come to think of it I'm not really clear why I had to pay the same amount every year if the amount to be paid off by the policy was getting less and less each year).

I'm guessing that if I cancel that policy and get a new one to protect the remaining balance for the remaining 10 years of the mortgage it will cost a lot less?

First thing first... dig out your docs and remind yourself of what you have bought!

To protect mortgages many people buy decreasing life insurance and so the sum insured goes down roughly in line with the anticipated repayment of the mortgage. 

You could argue that premiums should be bigger to start with because the potential payout is bigger but the risk of you dying is much less and so this is at least partially offset. As you get older then those two considerations move in opposite directions... payouts get smaller but risk of your death increases. 

For simplicity and certainty instead insurers give you a fixed price you pay for the whole policy... in economic terms it does technically mean you pay less in later years because economically £48 in 25 years would be less valuable than it is today. 


If you have paid a large lump sum and so changed the dynamics of your mortgage you can naturally get new quotes, you'll need to know what you currently have to ensure you are comparing apples and apples, and then see if the lower sum insured offsets your older age and changes in views on mortality since you bought the current plan. 

IdrisJazz

I echo what the others have said. £48pm does seem a lot for 100k death benefit (which is reducing).

I don't know what other cover you have, or whether you have other dependents, but you should consider what your dependents would need if either of you were to pass away. It might be more than just having the mortgage paid off, especially if there is a noticeable loss of ongoing income.

You could consider level term assurance instead of, say £125k. This is guaranteed to repay your mortgage now, and as time goes on there would be more left over as a result. Also, the value of your cover goes down as inflation rises. £125k in 10 years might not seem like much.

When I got married, I took out cover for my wife of £125k even though our mortgage was only £65k, because she was young and the cover was dirt cheap. But later on, after moving house, it still wasn't enough and we had to take out an additional policy. But that first policy of £90 PER YEAR was well worth it, and had a 35 year term so will continue to be excellent value.

My informal advice is always to overinsure when young and cover is cheap (especially if you expect to have children), because you won't be overinsured for long.

Pat38493

DullGreyGuy said:

Pat38493 said:

Hey all - I am currently paying each month about £48 for a protection policy that I believe was designed to pay off our mortgage in the case of one or other of us passing away before the mortgage is paid off.

The balance on the mortgage is obviously a lot less than it was at the beginning, and also we paid off about half the outstanding balance from a cash lump sum earlier this year.  The current remaining balance is £108000

As such, I suspect it doesn't make sense to being paying £48 per month to protect that (and come to think of it I'm not really clear why I had to pay the same amount every year if the amount to be paid off by the policy was getting less and less each year).

I'm guessing that if I cancel that policy and get a new one to protect the remaining balance for the remaining 10 years of the mortgage it will cost a lot less?

First thing first... dig out your docs and remind yourself of what you have bought!

To protect mortgages many people buy decreasing life insurance and so the sum insured goes down roughly in line with the anticipated repayment of the mortgage. 

You could argue that premiums should be bigger to start with because the potential payout is bigger but the risk of you dying is much less and so this is at least partially offset. As you get older then those two considerations move in opposite directions... payouts get smaller but risk of your death increases. 

For simplicity and certainty instead insurers give you a fixed price you pay for the whole policy... in economic terms it does technically mean you pay less in later years because economically £48 in 25 years would be less valuable than it is today. 


If you have paid a large lump sum and so changed the dynamics of your mortgage you can naturally get new quotes, you'll need to know what you currently have to ensure you are comparing apples and apples, and then see if the lower sum insured offsets your older age and changes in views on mortality since you bought the current plan. 

OK well I found the original documents - it's a decreasing term life insurance taken out in 2013 for both myself and my wife including terminal illness cover.

It was original at £273,000 and the current payout would be £223,000

The payment is £48.40 per month continuously until 2037.

The current mortgage balance is £108,600.  Current overpayment balance is shown as £80K, so I'm not sure why the insurance is scaled to pay out £40K more than what the balance would have been without overpayments.

Anyway that doesn't really matter as what matters is what we need now - I will get some quotes about it because realistically, we already have various other assets and covers in place that are mainly linked to pension and my employment and we don't really need £110K of extra life insurance right now.  Arguably we don't even need to cover the mortgage at all given that I am 55 next January (2024) and there's a good chance we might pay off the mortgage with tax free lump sum (or at least in one year from now we certainly could do that if I wanted).

dunstonh

The current mortgage balance is £108,600.  Current overpayment balance is shown as £80K, so I'm not sure why the insurance is scaled to pay out £40K more than what the balance would have been without overpayments.

The mortgage is affected by interest rates that will almost certainly be different to way the fall in the DTA is calculated.   

Anyway that doesn't really matter as what matters is what we need now - I will get some quotes about it because realistically, we already have various other assets and covers in place that are mainly linked to pension and my employment and we don't really need £110K of extra life insurance right now. 

The majority of the population are underinsured.   Why do you think you dont need the extra?

and there's a good chance we might pay off the mortgage with tax free lump sum (or at least in one year from now we certainly could do that if I wanted).

Robbing your retirement years is rarely a good idea unless you have excess money available.   have you checked you can afford to do that?

Pat38493

dunstonh said:

The current mortgage balance is £108,600.  Current overpayment balance is shown as £80K, so I'm not sure why the insurance is scaled to pay out £40K more than what the balance would have been without overpayments.

The mortgage is affected by interest rates that will almost certainly be different to way the fall in the DTA is calculated.   

Anyway that doesn't really matter as what matters is what we need now - I will get some quotes about it because realistically, we already have various other assets and covers in place that are mainly linked to pension and my employment and we don't really need £110K of extra life insurance right now. 

The majority of the population are underinsured.   Why do you think you dont need the extra?

and there's a good chance we might pay off the mortgage with tax free lump sum (or at least in one year from now we certainly could do that if I wanted).

Robbing your retirement years is rarely a good idea unless you have excess money available.   have you checked you can afford to do that?

Already have a lot of pension assets in place and I have pretty big death in service benefits while still working.  I also think my wife's NHS pension has a lump sum provision even when in payment but I think it goes down after a certain number of years.

Mortgage - it all has to be part of my retirement planning because our current mortgage term is till 2037 and I am planning to retire latest 2026, possibly earlier.   I am not going to work on till 2037 just because I have a mortgage, so this leaves only the choices
- Keep the mortgage in place and withdraw extra from pension will 2037 till mortgage is expired to continue paying the mortgage (and related costs like insurance or whatever).
- Pay off the mortgage as soon as I can get tax free cash.
- Downsize the house to pay off the mortgage soon after retirement (say 2028 or so).

This is all factored into my retirement planning.

In reality the 3rd option will probably be the one to choose as the current house we are in is way too big once the kids are not living there anymore and it is too much work and too costly to keep whilst retired.  I do realise that a lot of people who say they are going to downsize end up not doing it because they can't find a house they like, but I think for us it will be different as we will still be able to afford quite a good place even after paying off the mortgage and neither of us wants to stay here long term.