Save £2,238 On Your Life Insurance
Why buying life insurance from your mortgage lender could be a costly mistake.
If you're buying a home, you wouldn't apply for a mortgage with the first lender you stumble across, now would you? If you did, the chances are you would end up with a pretty expensive deal. So it's surprising then that many of us automatically take out life insurance with our lender without even checking out the competition.
Unfortunately, this not so Foolish habit is rather widespread. According to a recent report from the Post Office more than one-third (34%) of mortgage borrowers have bought their mortgage lender's life insurance. Alarmingly, of those people, 35% claim they felt pressured into buying it or didn't realise they had the right to take out cover with a different insurer.
Know Your Rights
But make no mistake. Taking out life insurance with your lender is not compulsory. You're free to go somewhere else if you can find a better deal.
True, it may be more convenient to arrange your mortgage and life insurance together but that doesn't always provide good value for money. In fact, you could be paying over the odds by more than £2,000.
That's a lot of money to waste, especially for homeowners with a mortgage millstone around their necks. When every penny counts, it's vital your life insurance isn't more of a drain on your finances than it needs to be.
Just take a look at the premiums below. The table compares the cheapest level term assurance policy on the market today with premiums from five large mortgage lenders who also sell life cover.
£100,000 Level Term Life Cover - Cheapest Policy Vs Mortgage Lenders' PoliciesProviderMonthly PremiumTotal Cost Over 25 Year TermExtra Paid By Not Choosing Cheapest PolicyCheapest policy
Sainsbury's Bank
£7.74
£2,322
N/A
Mortgage lender's policies
Nationwide
£10.10
£3,030
£708
HSBC
£12.45
£3,735
£1,413
Lloyds TSB (Scottish Widows)
£13.07
£3,921
£1,599
Halifax
£13.42
£4,026
£1,704
NatWest
£15.20
£4,560
£2,238
Source: Investment, Life & Pensions Moneyfacts. Halifax and NatWest premiums from lender's websites. Premiums are for £100,000 level cover for a male, non-smoker aged 35 over a 25 year term.
As the above table shows, the most competitively priced policy is provided by Sainsbury's Bank with £100,000 worth of cover available from as little as £7.74 per month. The total cost of the policy over the 25-year term is £2,322.
But, on the other hand, if you took out life cover with NatWest, the premiums would step up to £15.20 per month. Over the term this policy costs £4,560, which is almost double what you would have paid at Sainsbury's bank.
Don't forget, the premiums quoted are based on standard rates. Once an insurer has assessed your application, it will look at whether you pose a greater risk than most people would - in other words, whether you are more likely to make a claim on the policy. If you do pose a greater risk, your premium could be `loaded' and the price increased.
Level Term Assurance
OK, so you're prepared to shop around for the cheapest policy you can find. But which type of policy should you go for: level term assurance or decreasing term assurance?
Here's a quick re-cap on what level term assurance means first. With this type of policy, the amount of life cover you have stays exactly the same throughout the term of your mortgage (usually 25 years).
If you have a repayment mortgage, this means that throughout the mortgage term, you are covered for the original amount you borrowed, even though you have been gradually paying off your mortgage debt every month.
So, should your dependents need to claim on your policy at some point during the next 25 years, they will receive a surplus lump sum, on top of the amount needed to pay off your outstanding mortgage debt.
However, if you have an interest-only mortgage, there will be no surplus. This is because you are not paying off your mortgage every month, so the size of your debt remains the same.
Remember, once your mortgage term comes to an end, your policy is terminated.
Decreasing Term Assurance
Many people prefer to take out decreasing term assurance (also known as mortgage protection insurance) instead of level term assurance, because the monthly premiums are often cheaper.
A decreasing term assurance policy should provide you with enough money to cover your mortgage debt - no more, no less.
So as you pay off your mortgage and reduce the size of your debt, your life cover also reduces in size.
There is no build up of surplus cover over the mortgage term - which means the payout is potentially much lower. That is why this type of policy is cheaper than a level plan.
Bear in mind, not all insurers offer decreasing term assurance. But if you choose to go for this type of policy the same `search the market' principle applies. Don't simply settle for your lender's plan, because there's every chance a cheaper policy could be available with another insurer.
Of course, I'm not trying to say that all mortgage lenders will always try to sell you expensive insurance. Your lender may well offer you a competitive price. So don't avoid it like the plague. Just don't fall into the trap of choosing your lender's life insurance policy without shopping around first.
More: Why You Don't Always Need Life Cover | Life Cover: Keep Your Weight Down And Your Premiums! | Find a competitive life insurance quote using The Motley Fool Insurance Service.
The comments above are the opinions of the author only and do not represent advice specific to your circumstances.This article has been approved and issued by Direct Life & Pension Ltd who are authorised and regulated by the Financial Services Authority.The Motley Fool Insurance Service and The Motley Fool Life Insurance is a trading style of The Motley Fool Limited. The Motley Fool Life Insurance is provided and administered by Direct Life & Pension Services Limited. The Motley Fool Limited is an introducer appointed representative of Direct Life & Pension Services Limited, who are authorised and regulated by the Financial Services Authority. Registered office: Pinnacle House, A1 Barnet Way, Borehamwood, Hertfordshire WD6 2XX.