Mortgage Life Assurance

Did you fall for your mortgage lender's “and you’ll need our life insurance” pitch? If so it’s likely you’re paying massively over the odds; ditching and switching could get you the same cover, but possibly £5,000 cheaper over the life of the policy. Whether you’ve already got a policy, or need one for the first time; this is a step-by-step guide to slashing your costs.

• What is mortgage life assurance?
• The cost depends on you
• How to pick a policy
• Best Buys: Cheapest Policies
• Is it worth switching?
• Getting advice on complex issues
• Discuss / Other articles

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What is mortgage life assurance?

The idea is if you die, it ensures your dependents needn’t worry about repaying the mortgage as policies are designed to pay off the remaining debt on repayment mortgages if you die within a set number of years. Endowment mortgage holders usually needn’t worry about this as the life assurance is included within the endowment (more details on different mortgage types in the mortgage or remortgage guides).

Technically, its full name is Mortgage Decreasing Term Life Assurance (MDLA). The reason it is ‘decreasing' is because your outstanding mortgage debt, and therefore the potential payout, decreases over time.

Mortgage Life Assurance isn’t the same as…

It’s easy to confuse with other similar policies. So here’s a quick list of things it isn’t:

• Level Term Insurance

  This is bought to provide a lump sum to your family in case you die (see the Cheapest Level Term Assurance article) though it can also be used to cover your mortgage debt too, and is often more efficient if it does (see later).

• Whole of Life Insurance

  This is an investment based policy mainly used for inheritance tax planning (there's a useful list of definitions here).

• Mortgage Payment Protection Insurance

  While the name is similar, these policies are designed to pay off your repayments in the event of accident, sickness and unemployment rather than death; though there are some hybrids (see the Cheapest Mortgage Payment Protection Insurance article).

Is Mortgage Life Assurance worth having?

Most lenders strongly recommend you get a policy when you take out a mortgage and it isn’t a bad idea. If done correctly, it shouldn't be prohibitively expensive. Yet lenders will try and flog you their own ridiculously expensive policies, often without regard to circumstance. For example, if you don’t have anyone to leave your property to and money is tight, then there’s no need.

For many with dependents it’s also worth considering the cheapest Level Term Assurance policy instead. At the very least when getting a new quote, see what the price difference is. This is because level term policies pay a fixed amount rather than decreasing sum. This has two advantages; first it means if you trade up to a bigger house in future you mightn’t need much additional insurance, plus as well as paying off the house it leaves extra money for dependents.

An unpleasant fact... why's it assurance not insurance?

If you're wondering why it's life ‘assurance' not ‘insurance', that's because assurance is for something that is certain to happen, insurance is where there is only a risk of it happening..... and death is assured. Though some do call this ‘insurance' too as there's no guarantee you'll die within the term.

The cost depends on you

The cost of a policy will increase with the mortgage size, and the length of your term. Yet just as important is likeliness of your death during the term. This means age, sex and whether you smoke are big factors. It's also worth noting prices can change daily, so if your comparing a range of companies it's worth doing all at the same time.

• The less risk you'll die, the cheaper.

  Some MDLA policies also factor in health, occupation and participation in risky sports. So a 21-year-old, organic food eating, gym addict, who's alphabetised their vitamin collection, will probably find their policy pretty cheap.

  The fact pricing radically changes depending on who you are leads to an important rule...

  Disclose everything to the insurer, all past medical conditions and any risks. If not they can use 'non-disclosure' as an excuse not to pay out.



• Couples can do it together or apart.

  If you jointly own the home, get a quote for a joint policy which pays out on the ‘first death'. Though, there are no guarantees a joint policy'll be cheaper so you should always compare this to the cost of separate policies and do it the cheapest way.

Quit smoking or planning to?

Non-smokers pay a lot less cash than smokers, simply because they're a lot less likely to die during the term. To count as a 'non-smoker' you need to have been genuinely smoke free for at least a year. Therefore one year after the date you quit, you should go throught this process to get a new deal and you should save enormously. 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.

How to pick a policy

While some may be worried that ‘cheaper isn't better' actually, with term assurance, there's no investment element as the payout is fixed; and there's no argument over whether someone is dead so this is a truly simple policy. In fact, in most cases, (and do forgive the virtual shouting for necessary emphasis)...

"It's simply a case of the cheaper the better!"

The main things to make sure of are that the company is reputable, and as usual, the premiums (monthly payments) are fixed and not reviewable.

Does this logic apply to critical illness policies too?

I'm not a big fan of critical illness policies. Many believe they will "pay out if you get a serious illness and can't work". Yet that isn't true, critical illness policies pay out a lump sum if you get a specific critical illness as defined by the terms of the policy, which can often be changed; for example losing one leg isn't critical, but two legs is! So don't think "I'm covered for cancer"; most policies only cover a limited range of cancers.

Picking a good critical illness policy would take a doctor and financial nerd combined; so I suggest you're better off getting the mortgage term cover and a Medical Insurance or income protection policy - which does just that - protect your income from a range of eventualities.

The UK's Cheapest Policies

Life assurance prices change every day, therefore there’s no single ‘best-buy insurer’; yet there are ‘best-buy brokers’. This may surprise you, as a broker’s job is to trawl through life insurers to find the lowest priced policy for you, so you may think they’ll all find the same policy… yet some brokers get HUGE commissions from policy providers when they flog you a policy.

Brokers aren't all the same. Their commission levels and commercial relationships can massively impact what you pay.

The way to get policies even cheaper than going direct is to use the niche ‘execution only’ brokers give you the commission, and instead you just pay a small fee, and as such you get identical policies but at a much, much lower price.

However beware that the fact they’re ‘execution only’ means they just find you the price without giving any advice. If you'd like advice, to ensure you have the right cover or come back if it's not, read the Getting Advice section.

Having surveyed over 20 insurers for a range of quotes, there are three which are always competing to be cheapest; best practice is to use all three.

Remember all quotes are based on a healthy person so your price may go up if you have any health issues. Always check the full terms of the policy meet your needs before you buy.

• Cavendish Online

  This has been my top pick for over four years, and has consistently offered good prices during this time. It pioneered giving up all its commission in return for a one-off fee; £35 for an online application or £45 over the phone and can make it over 50% cheaper than most full-commission brokers.

  It offers two quotes, the ‘fee' and ‘fee-free' option; always choose to pay the fee, the monthly saving eats up the cost of the fee in just a few months. The commission option is only worth considering if your premiums (monthly payments) are under £7 a month. It has also recently introduced an 'instant cover' option, whereby applicants can get immediate cover if their application is medically fairly clean. Link: Cavendish Online

• MoneyWorld

  This is a firm of independent financial advisers that provides life insurance for a flat fee of £25 and no commission, either online or on the phone. It’s been around a while but recently moved to the ‘one-off fee’ practice and lowered its prices, and is often the cheapest of the top three.

  It also provides a paper free service, where the forms are completed for you over the phone, between 9am to 5pm weekdays, which costs £30. Link: MoneyWorld

• Life Insurance Online

  This a small broker that also charges a £35 fee and no commission. It’s out there to match Cavendish’s prices and seems to do it quite regularly. However I’ve less feedback on its service and reliability. Link: Life Insurance Online

Any new cheaper brokers will be included in the free weekly email

Other brokers included in the comparison: Asda, Direct Life, Life Assure Online, Life Direct, Life Saver, Lifesearch, MoneyBackMortgages, Sainsburys, Tesco, The Idol, TQ Online, More Than, AA, Legal and General, Marks and Spencer, Post Office, Egg.

Is it worth getting quotes from direct sellers too?

All brokers cover the same main life assurers, but they don't include the direct sales policies from the likes of Tesco, Direct Line or Sainsburys. Yet their prices are consistently more expensive than the cheapest brokers, so whilst for belt and braces you could include them in your quotes, I've never yet heard of a case where it's worth it.

Already got cover? Is it worth switching?

If you have an existing term policy, the above method should enable you to cut the cost. However if you've an existing policy you bought many years ago or have experienced health problems, the savings from buying a cheaper way may be cancelled out by the fact your risk level has increased.

If when you get a quote it shows you can save, all you need to do is set up the new cover and once you've got confirmation, end your existing policy; though a quick check of its terms and conditions first never goes amiss.

Getting advice for more complex issue

It's important to understand that all the above winning brokers are ‘execution only'. This means they don't give you advice, they just find you the cheapest policy within the parameters you set.

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 monthy payments if you become seriously ill or disabled) or really want a critical illness or income protection policy, it is worth considering getting advice on how to buy the policy, yet doing this means it will take some commission and you'll therefore pay more.

Make sure you ask for the advisory service if you want it, because some providers do execution policies as well. The biggest and most well known advisory broker is Lifesearch*, yet it's usually undercut by TQ online* and Life Assure Online*.

You could also try a specialist insurance broker; where you complete a detailed questionnaire about your individual circumstances before being sent any quotes, such as The Insurance Surgery and The Insurance Helpline.

What is writing in trust?

If you die the life assurance forms part of your estate. This could mean you're hit with a huge whack of inheritance tax. In many cases you can avoid this by writing the policy in trust. Do that and it pays out directly to your dependents, so it never becomes part of your estate, avoiding inheritance tax and speeding up the payout.

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. Although do note that once a trust has been set up, it can be difficult to cancel, even if all your beneficiaries agree, so think carefully about who a policy is designed to go to.

A 45 year old female non-smoker buying a £200,000 mortgage term policy lasting 20 years would pay £17.50 a month to a typical full commission provider. That's £4,200 over the whole term. Cavendish online is £13.54 so even including its £35 fee, the total cost is reduced to £3,290 - a saving of over £900.