Quick question re Life assurance for mortgage.

TJMD

Does the term of the policy have to match the term of the mortgage? We are thinking of gettiing a 25yr term policy. Then ending that policy and starting a new 25 yr policy in 5 years time. Mortgage term is 30 years.

dunstonh

Life assurance is what you want it to be. However, you may find the terms on 30 plans are not as favourable as 25 year versions. Particulary if you include CI cover.

You may also want to consider that from next April, the pension term assurance product is likely to come back into play and could replace the level term assurance product as the product of choice when it comes to pure life cover. If it is life only, then chances are you will be re-brokering your life cover next year anyway to get the tax relief available with pension term assurance.

Newbird

Dunst...tell me more about the Pension Term assurance, as I will be looking for new life cover for a mortgage extension, very soon....Do I wait until April then? or take out a term life policy now and cancel in April? What are the benefits of having a pension term policy instead please...thx Nb

dunstonh

If you wait until next April, you leave yourself uncovered until then.

Pension term assurance used to be popular some years back due to tax relief. There were restrictions on whom could have it and two variations depending on whether you were in an occ scheme or not. Then after 6/4/01, the rules changed. It made the product very restrictive as far as how much you could pay. Most providers then withdrew their product.

From April 2006, we have pension simplification (also known as A day) and those restrictions will be relaxed and pension term assurance will be treated as a pension contribution and the limits for that will apply. From 2006 that will be £3600 (gross) or 100% of earnings if greater (subject to the overall annual allowance which is £215k for 2006/7).

Now, with that in mind, the providers have been hinting at re-introducing pension term assurance. Whether it will happen on day 1 or later we do not know. Some may be fast to respond, others will be slow.

Pension term assurance is life cover only (although waiver of premium can be added). Critical illness cover is not included. Historically it was priced a little higher than level term assurance. However, due to the tax relief on the premiums this took the premium below the level term assurance levels. Higher rate tax payers can benefit even further. Also, those on childrens tax/working tax credits can class it as a valid deduction as its classed as a pension.

Example:
a level term assurance costing £50pm would roughly cost £55pm gross as a pension term assurance. However, the direct debit for the pension term assurance would be £42.90. (higher rate tax payers could claim more via their tax code).

So, you shouldnt hold back on life cover now but you should certainly diarise to investigate re-brokering life cover next year.

Newbird

K, thanks for that Dunst...

No I wouldn't want to leave myself uncovered until April, so need to do something b4 Apr...but what would happen if i cancelled to go with a new type PT policy? Is it a case of I simply stop paying the premiums and they simply stop providing the cover?

I am not a higher rate Tax payer, We don't get tax credits or childrens benefits...but still worth looking at huh?

dunstonh

life cover, once commenced, is pay as you go. Each payment you make covers you for the month ahead. So as long as your health is still good and you arrange the replacement before you cancel, you wont have any problem.

You may not have higher tax relief or tax credits but you still get 22% tax relief. If the net premium is cheaper than the level term assurance, then it makes sense to look at it.