Whether you’ve already got mortgage life cover, or are looking to get a policy; this step-by-step guide will help you slash costs.
If you bought from your mortgage lender you’re probably paying massively over the odds. Ditching and switching could get you the same cover for a fraction of the cost over the life of the policy.
What is mortgage life assurance?
Mortgage life assurance - also referred to as mortgage protection - is a type of life insurance that pays out if you die before you finish paying for the mortgage, ensuring that your spouse and dependants don’t need to worry about the monthly repayments.
There are two main types of mortgage life assurance; decreasing term, which pays out what's left to pay on your mortgage, and level term, which pays out a set lump sum.
What is the difference between decreasing term and level term life assurance?
Decreasing term life assurance is the cheapest form ot life assurance. As time passes, and your mortgage debt reduces, the payout on death also reduces leaving your dependants with the money to pay the rest of the mortgage. Level term cover, which tends to be more expensive, pays out a set lump sum during the mortgage term. See Cheapest Level Term Assurance for more.
What is the difference between mortgage life assurance and mortgage PPI?
MPPI is very different to mortgage life assurance, which pays your monthly repayments if you’re unable to work due to accident, sickness or redundancy. Read our MPPI guide for more
What is the difference between assurance and insurance?
Assurance is for something that is certain to happen, insurance is where there is only a risk of it happening and death is assured. However, some do call this insurance too as there's no guarantee you'll die within the term.
To buy or not to buy depends on whether you want your mortgage to be paid off so you can leave your house to your loved ones when you die. If your partner could cope with the full mortgage and household bills without you, you may not need mortgage life assurance but if you want someone to take full ownership of the property if you die early it is worth considering.
Lenders strongly recommend mortgage life assurance but beware buying directly from your lender as its cover is unlikely to be competitively priced.
What would happen if I don’t take out mortgage life assurance?
If you died during the mortgage term without cover, all your assets and savings would be added up to form your estate. Your estate is responsible for any outstanding debt you leave behind. If there wasn’t enough funds to pay your mortgage, the lender would repossess the property, sell it and return any extra money to your estate. If you were to die without cover and you had a joint mortgage, the debt would become the sole responsibility of the survivor.
Do I need cover if I am single and childless?
Probably not. However, you may still want to buy cover now so you have it in the future. While you’re young and in good health, mortgage life assurance can be very cheap. If your circumstances change in the future, for example, your health has deteriorated and you have dependants, cover can be significantly more expensive or, even worse, you may not be able to get it at all.
Mortgage life assurance: The five need-to-knows
Know all the basics of mortgage life assurance? Here are the five need to knows to making the right purchase
The less risk you'll die, the cheaper
The younger and healthier you are the cheaper it'll be. The fact pricing radically changes depending on who you are leads to an important rule... Disclose everything; all past conditions and any risks. If not your insurer can use 'non-disclosure' as an excuse not to pay out.
Protect your money
Writing the policy in trust means you designate who you want the money to go to and it is paid directly to them, ringfencing it from your estate.
This means the money cannot be claimed by your creditors; it wouldn’t be liable for inheritance tax as it never became part of your estate and it will be paid quickly as it isn't part of a will.
How do I put my life cover in trust?
This is relatively easy to do. When you get most insurance policies they include the option (and papers) about writing in trust directly at no extra charge.
Make sure you do it at the outset though as some won’t help you with it afterwards which could mean you need a solicitor to assist you. Note that there are different types of trusts and they can be difficult to change or cancel, even if all your beneficiaries agree, so think carefully about who a policy is designed to go to and get good advice from an insurance broker or a solicitor.
Going it alone is better than buying as a couple
When you buy mortgage life assurance, you have the choice of buying a single or a couples policy.
A joint policy is marginally cheaper but once it has paid out, it leaves your partner with no life cover. In additon, if you and your partner split - unless you wanted to keep joint cover - you would have to cancel the policy and pick up two single policies, which would be priced on your new age and health and is likely to be more expensive.
Two single policies, can be mantained whether or not you split from your partner and you effectively have double the cover as it pays out on both deaths if you were both to die during the term.
Does my partner need to use it pay off the mortgage?
Not necessarily. If you write the policy in trust, the payout will go directly to your partner. This means the money doesn’t go into your estate and therefore isn’t up for grabs for the people you owe money to.
However, if your partner, or whoever you left the money to, is also on the mortgage, they will now be fully liable for the remaining debt. If they aren’t on the mortgage and don’t want to pay the mortgage off, the lender will seek to remove them from the property and repossess so it can sell.
Quitting cigarettes lowers your premium
Non-smokers pay a lot less than smokers, simply because they're a lot less likely to die during the policy term. To count as a 'non-smoker' you need to have been genuinely smoke (and nicotine substitute) free for at least a year.
Therefore one year after the date you quit, you should go through this process to get a new deal. Don't be tempted to lie though... if you were to die and it was discovered you had been a smoker it could invalidate the policy. See other saving in the Stop Smoking MoneySaving guide.
Switch at your peril
If you have an existing policy, this guide should enable you to cut the cost if you switch. However, if you've had the policy for many years or have experienced health problems, the savings from buying a cheaper policy may be cancelled out by the fact your risk level has increased.
If you get a quote that shows you can genuinely save, all you need to do is set up the new cover and once you've got confirmation, end your existing policy. Cancelling a policy is very easy, just cancel the direct debit and stop paying the premiums.
Make sure you have checked the terms and conditions of both policies first though, just in case you’re not comparing like for like. An insurance broker may be invaluable in checking this is right for you as they will give you advice on whether to ditch or not.
How do I buy mortgage life assurance?
There are four main routes to buying a mortgage life assurance policy: using a comparison site, going directly to an insurer, using a discount broker or using a commission-based broker. You will also be faced with the choice of guaranteed or reviewable premiums. Each of these terms is explained below.
What is the difference between a discount broker and a commission-based broker?
A discount broker charges a small fee but sacrifices the commission. The insurer uses the fee to lower your premiums but the broker will not offer any policy advice. A commisson-based broker meanwhile, is unlikey to charge you a fee but gets paid from the commission of the insurer. Commission-based brokers will offer advice on the policies they sell.
What is the best route to take?
The best route to market depends on your knowledge of the product. A comparison site or discount broker will be good on price but short on advice. However, a commission-based broker will likely cost more but, if you are unsure of the market, you will be able to get advice.
Bear in mind that you can haggle with a commission-based broker. Once they have quoted you, ask how much commission they’ll make and ask if they will sacrifice any. Many commission-based brokers also regularly check in with you, sometimes annually, to see if policy still fits your needs.
Going direct to an insurer will not give you an overview of the market so only choose this route if you are sure you will get a good deal and that you are well versed in the way mortgage life assurance policies work.
What is the difference between guaranteed and reviewable premiums?
Guaranteed premiums are guaranteed. Once they’re agreed upfront, they can’t be changed by the insurer. Reviewable premiums on the other hand, can be changed by the insurer. So reviewable will be cheaper upfront, but may end up being more expensive in the long run..
Mortgage life assurance: Best buys
Read the basics and mortgage life assurance need-to-knows? If you are sure the product is for you it is time to buy. The sections below outline some of the cheapest brokers and direct insurers in the market.
Step 1: Benchmark using comparison sites
Buying via comparison sites may not be the cheapest option, as it is with car and home insurance, but it is a good place to gauge the rough price of the cover you will need and which provider might be best suited for you. Theidol.com, Compare the Market and Money Supermarket are good starting points.
Step 2: Check the rates of discount brokers and direct players
If you know what product you want check the rates of the discount brokers too to see if you can make a saving. Discount brokers will charge a one-off fee for their services but it doesn't mean you can't make a saving over the life of a policy.
For example, a 45-year-old smoker buying a policy via Compare the Market will pay £46.21 per month, while you can get the same policy from Cavendish Online for £39.45. Factoring in the £35 fee over the life of the policy.
Step 3: Consider advice for complicated circumstances
If you need advice for your purchase, consider using a commission-based broker. A commisson-based broker gets paid from the commission of the insurer - so it is possible they won't charge a fee - but they will offer advice on the policies they sell.
If you have complicated circumstances, such as medical conditions or complex trust issues, want a waiver of premium (where you don't have to continue making monthly payments if you become seriously ill or disabled, commission-based brokers could be the best option for you.
This is always a difficult one as, of course, if you’re getting advice then you’ll want it to be as good as possible, so you have to decide whether cheapest is best for yourself.
Go to an IFA
Independent financial advisers cover life insurance, among other products, and may be able to see where it fits in with your other protection and wider money issues. It’s also a good idea if you’d prefer face-to-face. They are regulated and must pass exams on more subjects than brokers, though the costs can vary on whether you pay fees or commission, for more and how to find an adviser (see the IFA guide).
Go to a specialist advisory brokers
The selling of life insurance is a regulated activity which means brokers have to meet certain standards set by the regulator, the FCA, and you can complain if things go wrong. Anyone giving advice also needs to achieve Competent Advisor Status by taking FCA approved exams, ask your broker what exams they've taken if you want to check their qualifications.
The biggest and most well known broker out there is LifeSearch, yet in the quotes we received other advisory brokers undercut it, such as MoneyMinder, TQ online, Life Assure Online* and online advice site Getliferight (part of LifeSearch).
The top pick discount brokers are Cavendish Online and Moneyworld and both will give cheap premiums. Remember, however, that discount broker charges a small fee but sacrifices the commission. The insurer uses the fee to lower your premiums but will not offer any policy advice.
Step 4: Check your policy
Always double-check the policy terms. Once you've found the best quote check whether it's suitable. If you're a smoker have you submitted it? You don't want to risk a potential claim being turned down.