Life Insurance

We all know that the only thing that is absolutely certain about life is that one day we are going to die. But the certainty soon disappears when it comes to trying to predict when this inevitable event will occur.

Being fatalistic is all very well if you are single with no dependants, but most people with partners and children simply cannot afford to leave anything to chance. An untimely death can result in loved ones being left with crippling debts and, in an age when the average homeowner is mortgaged up to the hilt, it can easily lead to losing the family home.

Whilst lenders may be prepared to give a few months’ grace to widows who are unable to meet their mortgage payments it won’t take long for compassion to give way to repossession.

Life Insurance Can Help

Fortunately, however, it is possible to protect against such a dread scenario by taking out Life Assurance or Life Insurance, and statistics suggests that this is an option that few people with dependants can afford not to consider. Research by reinsurer Munich Re shows that there is a one in 12 chance that a claim will result from a 30 year old male’s Life Assurance or Life Insurance policy by the time they are 65.

Explaining the Different Names

Life assurance is sometimes incorrectly referred to as “life insurance” for the purposes of simplicity. But “insurance” technically refers to covering something that is definitely going to happen, and death obviously fits into this category. “Insurance”, on the other hand, refers to covering something that may or may not happen.

Just to add to the confusion, Life Assurance or Life Insurance used specifically to protect a mortgage is sometimes referred to as “mortgage protection insurance”. This is the same title that is also often used to describe a quite different product known as mortgage payment protection insurance, which protects against being unable to work due to accident, sickness or involuntary unemployment.

Term  Life Insurance

Virtually all Life Assurance or Life Insurance taken out to protect a mortgage only lasts for a fixed term. “Term insurance”, as it is called, only covers you if you die within the period of the policy. It is much less expensive and simpler to understand than open-ended cover designed to last for the whole of your life.

How Term  Life Insurance Works

You decide on the amount of cover you want, which will normally be at least equivalent to the size of your outstanding mortgage. You also decide on the length of your cover period, which will usually be the length of the mortgage term.

The insurer will then quote you a price for a regular monthly premium payable throughout the life of the policy. If you die within the term of the policy it will pay out a lump sum, but if you die once the policy term has finished it will not pay out anything.

Most Life Assurance or Life Insurance policies will also pay out the same lump sum if you are diagnosed as suffering from a terminal illness and have less than a year to live.

Level Or Decreasing Term Life Assurance or Life Insurance

There are two main types of term Life Assurance or Life Insurance that can be used for protecting a mortgage. With “level term insurance” both the premiums and the size of the potential lump sum pay-out remain fixed throughout the term. With “decreasing term life insurance,” on the other hand, the premiums remain fixed but the potential lump sum pay-out decreases in line with your mortgage - to nil at the end of the term.

Decreasing term Life Assurance or Life Insurance tends to cost around one third less than level term Life Assurance or Life Insurance on average and can therefore be attractive to those with repayment mortgages who are looking to cut costs, but anyone with an interest only mortgage will need level term life insurance.

Even though decreasing term Life Assurance or Life Insurance will pay off the mortgage, many financial planning experts feel that term Life Assurance or Life Insurance costs as a whole are so low that it can make sense for those with repayment mortgages to pay slightly extra for level term Life Assurance or Life Insurance. This way, should death occur, there will be something left over for other expenses as well.

What Does It Cost ?

But published headline premium rates do not always tell the full story because factors such as state of health and smoking habits can have a huge influence on price.

Insurance companies do not exclude medical conditions on Life Assurance or Life Insurance policies but they often impose premium loadings to take account of the additional risk. Those with the most serious medical conditions could be asked to pay as much as four times the standard rate or could even be turned down altogether.

Joint-Life Assurance or Life Insurance Cover

Where couples jointly own a home it can be possible to reduce costs slightly by opting for joint-Life Assurance or Life Insurance cover. Although the policy will cease on the first death, the mortgage will have been completely paid off.

Critical Illness Cover

Many homeowners also choose to take critical illness cover as an add-on to their Life Assurance or Life Insurance policy in order to safeguard against serious illness as well as death. This pays out a lump sum if you are diagnosed as suffering from one of a stated number of serious conditions. But critical illness cover greatly increases the cost of protecting a mortgage

Does Everyone With A Mortgage Need Term Insurance?

Anyone with an endowment mortgage should not need term Life Assurance or Life Insurance because the endowment policy should have sufficient Life Assurance or Life Insurance cover built into it to pay off the mortgage in the event of death. Single people with no dependents may also decide that cover is not necessary, unless their mortgage lender insists on it - which most don’t.

The Application Process

Taking out Life Assurance or Life Insurance cover should be straightforward and speedy if you have a clean health record.But if you are applying for exceptionally large amounts, or if the insurer is concerned that your health might represent an above average risk, it may write to your GP for further information or even ask for you to attend an independent medical examination. The process could therefore drag on for several weeks or even months.

Make sure that you answer all questions on your application form honestly. Even if the insurer doesn‘t write to your GP at outset it certainly will do so in the event of a claim and it can refuse to pay out if it finds that relevant information has been withheld.

Buying From the Right Source

It is important to realise that term Life Assurance or Life Insurance offered by banks and building societies is often highly uncompetitive and that you are under no obligation to buy from your mortgage lender. Looking elsewhere cannot jeopardise your chances of being granted a mortgage and a specialist Life Assurance or Life Insurance intermediary may well be able to provide you with a quote that is at least one third cheaper.

Even if you feel too busy to shop around during the house-buying process you can still switch to a more competitive Life Assurance or Life Insurance policy later.

But never cancel your existing Life Assurance or Life Insurance policy until your have actually been accepted for a new one. This is because if your health has deteriorated you could be charged more than you are paying for your existing Life Assurance or Life Insurance policy, or even declined altogether. It is quite possible to have developed health problems without actually being aware of the fact.

 Life Insurance – The do’s and don’ts

• Do stop and think before buying life assurance or life insurance. Check what life insurance cover you already have. Only then should you think about buying cover.

• Do keep life insurance or life assurance and savings separate. It’s the golden rule that if you need life assurance/insurance buy term life assurance/insurance.

• Do seek independent advice when buying life assurance or life insurance cover
  Do write your term life insurance policy into trust.

• Don’t be afraid to shop around for life insurance or life assurance

• Don’t buy life assurance or life insurance if you have no dependents

• Don’t surrender your life assurance or life insurance before seeking independent advice.

• Don’t be taken in by newspapers adverts or mailshots. You are much better of by seeking independent advice.

• Don’t forget to buy life insurance or life assurance before you die if you have a partner or other dependents.