Advice on 'mismatch' between mortgage and life/critical illness policy

Hazelnutty

Hi all

I've been exploring the possibility of taking out the Green Additional Borrowing from Nationwide to fund solar panels and it's thrown up an issue with my life assurance I wanted to check out with the knowledgeable folks on here.

There's a slight mismatch between my current decreasing term life & critical illness policy (current value £136062) and my mortgage balance (£137968). I think this has happened as I borrowed some additional funds when I remortgaged last year to redo the bathroom. I was overpaying on my mortgage to recoup this but with savings rates as they are it doesn't make sense any more (rate is 2.29% fixed for 5 years).

As part of the process of applying for the additional borrowing (£6k @ 0% for 5 years), the mortgage adviser told me the following 'the current level of cover you have provided doesn’t match your mortgage, meaning you are paying for something that doesn’t insure you correctly and potentially leaves you unprotected should you need to claim'. 

I was really confused by this. Surely the policy would pay out regardless of any shortfall? I'm not planning to run the mortgage for its full term anyway (plan's to save what I would overpay in a high interest account then clear it off as soon as it make financial sense to do so).

If I do take out a new policy, now I'm older, wouldn't the additional cost over the course of the mortgage end up being way more than the current shortfall?

My question is: do I need to worry about what the adviser said? Any advice/insights welcome

Thanks so much!
HN

ACG

There is no requirement to have any life or critical insurance. The insurance and the mortgage are independent of each other, you can have one without the other. 

If you do not want the top up, let them know. It wont affect the mortgage. 

Hazelnutty

Thanks @ACG Gotcha on the requirement. Leaving the additional borrowing aside, would you approach the life assurance company and top up? I'm assuming not as the mismatch is so small?

DullGreyGuy

Sounds like an advisor looking for a sale!

Decreasing Life cover is intended to roughly match your mortgage, it's never going to 100% match it as, for example, interest rates change frequently.  As such there is always likely going to be a slight excess or slight shortfall in the event of a claim. 

Technically the two products are totally independent, the money is aligned to the mortgage roughly so if on your partners death you wanted to pay off the mortgage you could but if you'd rather use the money for a round the world cruise with your new lover who's half your age then you're perfectly entitled to do that with the money as long as you keep paying the mortgage payments. 

Any review of your insurances should be done in the whole and not really just one policy at a time. Whilst your extra lending may mean this one is now a bit short it may be that you'd bought a level term policy to have funds until your kids finish uni but they may now have decided they won't go to uni and so that policies purposes has disappeared and you could keep it for the shortfall or drop it etc

kingstreet

Hazelnutty said:

Thanks @ACG Gotcha on the requirement. Leaving the additional borrowing aside, would you approach the life assurance company and top up? I'm assuming not as the mismatch is so small?

No. Get independent advice on all the options. You may be able to replace the cover with a better quality and cheaper alternative.

ACG

There is no harm reviewing, as kingstreet says there may be better options. 
But no, I dont think personally I would go out of my way for a £5k shortfall for a short period of time. That being said, whilst I appreciate what DullGreyGuy is saying about the broker looking for a sale, we live in a regulated world so it could be that the person is after a sale but it could also be that it is a requirement to mention it... 

Veteransaver

Worth checking if you have a company pension whether there is a Death in service policy attached, often these pay out 4-12x salary so your decreasing term life policy may not be needed, whilst they are a good idea when you first take them out at the start of the mortgage, they do become relatively less good value over time

DullGreyGuy

Veteransaver said:

Worth checking if you have a company pension whether there is a Death in service policy attached, often these pay out 4-12x salary so your decreasing term life policy may not be needed, whilst they are a good idea when you first take them out at the start of the mortgage, they do become relatively less good value over time

The OP has CI and Life... how will death in service help if they have a stroke and survive but can no longer work?

How will death in service help if they are made redundant next year and then get hit by a bus? They could take new insurance out again but being much older it will be much more expensive.

Relying on purely an employee benefit is a risky strategy. In my experience DiS tends to be closer to 4-6x salary and so that would barely cover your partner for your loss of income for a reasonable time let alone also pay off the mortgage as well as that.

tacpot12

I agree that relying on employee benefits is a risky strategy, and always advise people to take out level term insurance to cover their mortgage rather than decreasing term, as its very nearly as cheap, and people usualy need more insurance later on in life, e.g. when moving to a larger home. Life insurance is never so cheap as when you are young and fit. 

kingstreet

I would also suggest giving priority to income protection to replace your income in the event of illness/disability ahead of critical illness cover. You may not get the lottery win buzz of £500,000 upfront, but half your income, tax-free, for the rest of your working life could work out much more cost effective and can simply be claimed with an inability to carry out the main requirements of your own occupation.

Hazelnutty

Thanks to everyone who's commented. I do have DiS with my employer but some kind of income protection sounds sensible as I'm the sole wage earner in my household. I also take the point about reviewing insurances as a whole. I've never done this and should have - in terms of finding good independent advice, where would you start?