Mortgage Protection Policy....what now?

vicwatson

A friend of mine was telling me last night that he took out a mortgage protection policy (basic) in 2010 for 25 years to cover his mortgage.

He's in financial difficulties and has recently agreed with his bank to split the mortgage by paying an amount he can afford until 2035 and then will have an amount at the end that he will have to pay or else he gives up his right to the property, he's hoping he can put extra money into the "parked" amount over time to reduce it's balance.

Anyhow his question to me was what to do about his mortgage protection policy that he took out in 2010, he was obvioulsy paying x amount per annum based on the mortgage amount taken out but now that has changed he is wondering what he needs to do, he isn't on boards hence me looking into it for him.

What should be his best move at this point?

Thanks for any advice in advance

phormium

Assuming the policy he has is a basic reducing mortgage protection policy then the balance that would be paid out will be reducing each year in line with what the mortgage would have been expected to reduce.

As the mortgage has now been split this means that should he die then the amount paid out would be insufficient to actually clear the remaining mortgage.

He can take out a new level amount policy for the parked bit if he wanted and keep the existing policy or take out a full new policy on a level term which would pay out a set amount regardless of what is owing on the mortgage, obviously this is likely to be more expensive than the existing one, I am assuming he does not have extra disposal income at this time so this might not be a runner.

Worst case scenario if can't afford anything extra just keep going with the original one, at least it is providing some cover but ideally extra cover would be nice to cover the shortfall of the parked portion should it be needed.

vicwatson

Thanks for that reply.

You think he is overpaying on the original policy though now that it has been split or.....? I'm thinking that say the mtg was 300k and is paying 100€ a month for this, he splits 100k and 200k, is he not still paying 100€ per month to cover the 100k unparked amount and effectively not covering the bank or spouse should he die on the 200k parked amount?

phormium

That's not really the way it works, if he is paying for example 100 pm to cover 300k on a decreasing basis and he dies say in yr 15 of the mortgage then the insurance company pays out what the balance of the full mortgage should have been at that stage had everything continued as normal with payments/interest etc.

So the unparked amount will keep reducing but obviously the parked amount won't so the amount paid out would be based on what the total reduced balance should have been (confused yet?), without working this out on a spreadsheet I imagine the amount paid out would be more than enough to clear the unparked and some left to go towards the parked but insufficient to fully cover it as it hadn't been reducing as expected.

There are tables online where you can input details of mortgage etc and show how it reduces over the years, equally the insurance company may be able to give him an illustration of what the expected reducing payout would be over the course of the term as they factor in a presumed interest rate into the calculations. This would show him what the likely shortfall could be so he can decide if he considers it essential to take out more cover to protect spouse.