Part Mortgage Protection Insurance + Term Life insurance Query

mugsymugsy

Hi all looking for some guidance.

Looking to get a mortgage for 260k and a condition of the mortgage is to have insurance in place to cover the mortgage.

Rather than taking a straight forward mortgage protection decreasing amount over 30 years (term of mortgage) i thought about taking a term life policy for 160k over the same period and taking mortgage protection for 100k over 15 years.

The reason being that i would be fully covered for the mortgage period but from year 15 onwards i will have a greater amount of insurance to cover the mortgage + extra for family in event of a death.

Can anyone see a problem with the bank accepting this way of covering the mortgage?

Thanks in advance

phormium

Yes the bank will have a problem with that, they need insurance in place for the full amount and term of the loan before you will be able to draw down the mortgage.

It's not the bank being picky, it's the Consumer Credit Act of 1995 which obliges a mortgage lender to ensure there is full cover in place for the mortgage for the term.

Yakuza

I would imagine the bank preferring one policy assigned to them rather than two (simplifies things at their end). Decreasing term policies normally decrease at a slower rate than you pay off the mortgage, so after a few years there's usually a bit of a surplus (difference between mortgage outstanding and the sum assured of the policy) building up anyway. Also, a 15-year term won't suffice for a 30-year mortgage.

By taking out two policies, you're probably suffering two sets of charges built into the prices of the plans, why not just take out the a larger DTA policy (it will be cheaper) and take out some kind of investment / regular saving plan with the difference between what you would have paid on the combination of the two plans you proposed? (Or overpay your mortgage if you can). If you live to the end of the term, you're left with zilch benefit, your cover just expires and you may find it harder to get cover at that stage as you'll be older, so you could choose a convertible term policy to maintain cover after the mortgage is finished (this is normally a bit more expensive than regular term, but it gives you the option to extend your cover into a whole of life contract)

Caveat : While I do work in the Life industry, I'm not qualified to give advice and you should always seek advice from someone who's authorised by the CBI to do so.

mugsymugsy

Thanks for the replies phormium & Yakuza. Perhaps i wasn't clear. I would ensure that the term life policy was taken out before the mortgage and have the bank nominated to call on it in the event I or my wife snuffs it. The reason that I would have the 100k for 15 years is that after this time the mortgage amount to clear will be less than 160k so therefore the term life policy would pay off if necessary. Then over the next 15 years if it did have to be called on it would be greater than the mortgage amount and thus have value.

If i go for the mortgage protection over the 30 years then I will be paying out the same amount across the 30 years but if it is called upon in the last 15 years (when its more likely to be) whilst it will cover the mortgage their is nothing left for the family.

mugsymugsy

Thanks for the replies phormium & Yakuza. Perhaps i wasn't clear. I would ensure that the term life policy was taken out before the mortgage and have the bank nominated to call on it in the event I or my wife snuffs it. The reason that I would have the 100k for 15 years is that after this time the mortgage amount to clear will be less than 160k so therefore the term life policy would pay off if necessary. Then over the next 15 years if it did have to be called on it would be greater than the mortgage amount and thus have value.

If i go for the mortgage protection over the 30 years then I will be paying out the same amount across the 30 years but if it is called upon in the last 15 years (when its more likely to be) whilst it will cover the mortgage their is nothing left for the family.

phormium

The bank must ensure cover is in place for the full mortgage for the full term day one.

If I am understanding you correctly you would have cover in place for the full amount from day one but some of it would only be for a 15 yr term, this will not satisfy their requirements. The fact that you have alternative cover to kick in after that 15 yrs, while making sense to you, does not meet the requirement which is set by the CCA.

If the bank are not assigning the policy (although I think they all have gone back to doing this, several didn't in previous years) then there would be nothing stopping you taking out what the bank require and changing it after draw down. But if the bank assign then they still may not be happy with the changes you want to make but at least they will have fulfilled their requirements by making sure the full cover for the full term was in place before draw down.

mugsymugsy

Thanks for the input again. Rather than create a headache for bank and admin over load ill decide to do one policy or the other and not go down the route of two policies. Ill speak to a broker and see what price differential there is between mortgage protection or level term life assurance and way up the pros and cons

phormium

Good decision, have a look at your options with an adviser.

It wouldn't be a headache for the bank, they'd just say no and you wouldn't be drawing down

PaulM1977

Ask your broker about a convertible mortgage protection policy, which is available from 2 different life assurance companies at present. It may be an alternative to what it is that you are proposing/hoping to do.