The terrible mistake 40% of homeowners are making

Life insurance is essential for many of us, yet many are without this protection.

Just six out of ten mortgage holders in Britain have life insurance in place to cover their mortgage payments, should the worst happen.

That’s the finding of a new survey by Sainsbury’s. That leaves 40% of mortgages without cover, the equivalent of around seven million people, with mortgages worth a whopping £245 billion.

Why are so many people skipping out on life insurance? And why is it such a risky thing to do?

Do I need life insurance?

First of all, it’s important to remember that not everyone even needs life insurance.

A simple way to work out whether life insurance is necessary is to ask yourself this question: “Will anyone lose out financially if I die?”

So if you’re married and bought your home with your partner, clearly he/she would either have to pay the mortgage alone if you passed away or lose/sell the family home, and so would be faced with financial hardship at the worst possible time. And if you have children, your surviving partner would also not only have to worry about paying the mortgage and other bills alone, but also the cost of childcare, education, etc.

That said, if you’re single, with no children, and nobody beyond you relying on your monthly pay cheque, then life insurance is not as crucial for you. Just bear in mind that when you die, you won't be able to pass on the mortgaged property as an inheritance unless your beneficiaries pay off your outstanding mortgage debt themselves.

Skipping cover

According to Sainsbury’s research, the average outstanding mortgage sum of those borrowers who do not have cover in place currently stands at over £36,000. So hardly small change.

What’s more, many of the people without cover fall in the age bracket in which they are most likely to have some financial dependents – one in three 35-44 year olds don’t have cover, for example, while 30% of 45-54 year olds are also unprotected.

Cheap life insurance

Sadly, this isn’t the first survey exposing the underuse of life insurance, and it certainly won’t be the last. And whenever these studies appear, one reason is regularly cited for people ignoring life insurance: cost.

It’s understandable at the moment that people review where their money is going each month, and want to make cutbacks. And if you’re already spending more than you should, adding to that expenditure is hardly an appealing thought.

But the fact is that life insurance is incredibly cheap at the moment, and has actually been falling in price over the past decade. There’s never been a better time to get yourself insured!

For a 30-year old non-smoker, a 30-year level term policy of £150,000 cover could set you back as little as £9.01.* Shelling out less than a tenner a month, for the peace of mind that comes with knowing your family will be ok if you get hit by a bus. That’s value for money in my eyes.

What's more, cover is only likely to get more expensive in the future. Be sure to read Insurance rates to soar for women for more.

Life insurance is complicated!

Another reason that many are put off by life insurance is that it can all seem a bit complicated. After all, life insurance comes in different forms. However, the distinctions between the different types of cover are actually pretty simple, despite the heavy use of jargon.

Level term assurance

Over a specified term, say 30 years, your policy will pay out the same amount, no matter whether you die in year one or year 29.

Decreasing term assurance

Once again, your cover will pay out so long as you die within the specified term. However, the amount it pays out will decrease over time. So your family will get a smaller payout in year 29 than in year two.

This is typically cover taken out for the sake of just covering the mortgage, and also works out cheaper than level term assurance.

Guaranteed whole-of-life insurance

Thankfully, with life insurance, the names of the products often tell you the whole story, and this form of life insurance is no different. Your family is guaranteed to get a payout whenever you die, rather than only during a specified term.

Family Income Benefit

Finally, family income benefit pays out in monthly instalments, effectively like a salary, rather than in a single lump sum. This can make life a little easier for your loved ones, as they don’t need to worry about investing a large payout – which you typically get with other forms of life insurance - and all the associated charges and costs that may come with such financial decisions.

It’s also about a third cheaper than traditional life insurance policies.

I’ve got cover, now I can forget about it

Undoubtedly some of you will be reading this, feeling pretty smug about the fact that you already have cover. And while that’s obviously laudable, the fact that you have some form of life insurance in place does not mean that now you can forget about it – life insurance is something you need to review on a regular basis.

For example, when I took out my life insurance, it was to cover the mortgage when my wife and I bought out first home. Now, though, we have a son. So should I die, the costs my wife will be left with will be more substantial than when it was just the two of us. So I really need to sort out a higher level of cover.

Similarly, if I buy a new house, I’m going to need an updated policy, as my mortgage will likely be larger, meaning I’d need to expand the level of cover in place.

*Via the lovemoney.com comparison engine