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Mortgage Life Assurance Cut the cost by 30%

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House in a briefcase of moneyWhether you’ve already got a mortgage protection policy, or need one for the first time; this is a step-by-step guide to slashing your costs.

If you fell for your mortgage lender's "and you’ll need our life insurance" pitch 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.

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.

Don't confuse it with...

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

    House and money on a scale
  • 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).

    Life buoy
  • Whole of Life Insurance

    This is an open ended investment based policy mainly used for inheritance tax planning that runs out when you die, rather than after a fixed time.

    house next to a pile of money
  • 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 it 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 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.

If you're wanting to provide a regular income for your family, rather than a lump sum, the Family Income Benefit is an alternative. This provides an annual tax free payment for a set period. Some of the best buy brokers below offer quotes for a FIB but if you're not sure if it's for you read the Getting Advice section.

Why is it assurance not insurance?

If you are wondering why it is 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 Key Decisions

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 you're 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; all past conditions and any risks. If not they can use 'non-disclosure' as an excuse not to pay out.

  • Do it as a couple?

    Couples can go for either separate or joint policies which pay out on the first death. However a joint policy would only be suitable if you need to pay out the same amount for both partners. Even if a joint policy does look suitable, it's worth getting quotes for standalone policies anyway, as it's often cheaper.

  • Stubbed cigaretteQuit 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 through 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.

  • Am I protected if the broker or insurer goes bust?

    The only payment you're likely to make to a broker will be any fees and charges, the bulk of your money will go straight to the insurance provider. These are covered by the same government-backed Financial Services Compensation Scheme (FSCS) as banks, meaning if they go into default, you’re protected.

    In the unlikely event it happened, the FSCS will try and find another provider to take over or issue a substitute policy. However, if you’ve ongoing claims, or need to claim before a new insurer is found, the FSCS should ensure you're covered. For more see the Insurance section of the Savings Safety guide.

  • Already got cover? Is it worth switching

    Light switches If you have an existing policy, this guide should enable you to cut the cost. However if you've had the policy for many years 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 (check the cover is at the same level though), 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.

  • What is writing in trust?

    If you die the life assurance forms part of your estate which could mean it's hit with a huge whack of Inheritance Tax. In many cases it's possible to avoid this by writing the policy in trust, as long as this is done at the time the policy is taken out.

    Do this and the insurance 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 is very difficult to cancel, even if all your beneficiaries agree, so think carefully about who a policy is designed to go to.

    If you decide to do this you will most likely need to get advice.

  • Does this logic apply to critical illness policies too?

    Red and blue pillsWe're not big fans of critical illness policies. Many believe they will pay out if you get any serious illness and can't work. Yet that isn't true, critical or serious illness policies pay out a lump sum if you get a specific illness as defined by the terms of the policy; 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 or serious illness policy would take a doctor and financial nerd combined; so one option is to get the life insurance and an income protection policy - which does just that - protects your income from a range of eventualities. If you want critical illness though, speak to an advisor.

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Finding the cheapest policy

While some may be worried that 'cheaper isn't better', with life 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, provided you've disclosed adequately...

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

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. 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 that 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.

Quick broker warnings...

There are a few warnings that go with using an 'execution only' broker:

  • Premiums: Check the premiums (monthly payments) are guaranteed and not reviewable.

  • No advice: 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 have some come back if it's not), read the Getting Advice section.

  • Health: Remember all quotes are based on a healthy person so your price may go up if you have any health issues.

  • T&Cs: Always check the full terms of the policy meet your needs before you buy.

  • Reputation: Is the company is reputable? If you haven't had feedback from elsewhere, ask in the MSE Forum.

Lowest Quote Brokers

Having surveyed over 20 insurers for a range of quotes, there are a few which are always competing to be cheapest; our suggestion is to always check the top two and then add in the rest if you've time. Remember if you're not sure what you're doing consider getting advice.

Check these first...

Both of the following offer some policies with an 'instant cover' option, where applicants can get immediate cover if their application is medically fairly clean.

Take care to only use the links we've provided, as some more expensive companies pose on Google using very similar names.

Cavendish

Cavendish Online

Top pick on price for years, this site has consistently offered low quotes and pioneered giving up its commission in return for a one-off fee of £35.

Results include a 'fee' and 'fee-free' option; the latter may be cheaper for low premiums or short term policies.

One thing to note; if your premium is deferred or increased due to health / lifestyle reasons you'll be offered either another policy or a full refund of the fee.

Link: Cavendish Online

MoneyWorld

Moneyworld

This is a firm of independent financial advisers that often matches Cavendish on price and has a lower fee of £25.

The site also offers a 'fee' and 'fee free' option by completing an online quotation form.

If for any reason you do not want to proceed, are declined or rated, you will receive a full refund of the fee on request.

Link: Moneyworld

Then, for wider coverage...

These small brokers charge a fee of around £30, and depending on your circumstances can rival the two sites above, so get quotes if you've time to see if one of them is good for you.

However as they're newer to our guide be aware we have less feedback on their service and reliability so pls let us know what you think in the Life Insurance forum discussion.

  • Money Minder
  • C Life Cover

Other brokers included in the comparison: AA, Asda, Barclays, Contact Insurance, Direct Life, Legal and General, Life Assure Online, Life Direct, Life Saver, Lifesearch, Liverpool Victoria, More Than, Sainsbury's, Tesco, The Idol, TQ Online.

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 Sainsbury*. Yet their prices are consistently more expensive than the cheapest brokers, so whilst for belt and braces you could include them in your quotes, we've rarely seen it.

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Cheapest 'with advice' brokers

A crowd of people with speech bubblesIt'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, and if you get it wrong it can end up costing you more in the long run.

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) or really want a critical illness, income protection policy or family income benefit, 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.

Still if you're unsure what you're doing it's often worth it.

Cheapest advice

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. There are two choices here:

  • Go to an IFA. Independent financial advisors cover life insurance, amongst 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 advisor (see the IFA guide).

  • 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).

CoinsThe Cost Differences

A 45 year old female non-smoker buying a £200,000 mortgage term policy lasting 20 years would pay £16 a month to a typical full commission provider. If you choose to go execution only then the savings can be huge (but you've no comeback).


£200,000 Mortgage Decreasing Term Assurance costs over 20 years
Direct from big name insurer
Full Commission Provider
Discount
Broker
Savings Over Full Term
Monthly
Full Term
Monthly
Full Term
Monthly
Full Term
Female 30 smoker
£9.99
£2,400
£8.77
£2,100
£6.16
£1,515
£885
Male 30 non-smoker
£9.60
£2,300
£8.30
£2,000
£5.79
£1,425
£875
Female 45 non-smoker
£17.08
£4,100
£15.93
£3,825
£10.95
£2,665
£1,435
Male 45 smoker
£40.81
£9,800
£38.19
£9,170
£30.07
£7,250
£4,400
Joint 2 x 35 smokers
£25.72
£6,175
£26.18
£6,280
£18.61
£4,500
£1,675
(A) Assumes person in good health, age given is age next birthday
Prices as at August 2010


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