Thursday, August 28, 2008

Mortgage Protection (Which Policy?)

When someone is taking out a mortgage and there is a requirement by the lending institution to have Mortgage Protection, the question often arises as to whether it is better to put in place a basic ‘decreasing term’ policy, with life cover only, or whether it is more advantageous to go for a policy that provides more cover than is legally required.

Up to recently, all lending institutions took an assignment over the policy so that, in the event of the early demise of the life insured, the policy benefits were paid to the bank or building society. In other words, the lending institution received the sum insured and the mortgage was cleared.

If there was any excess of cover, over and above the amount that was owed, this was then paid to the estate of the deceased person. If you missed a premium on the policy, the lender would have been notified and they in turn would have taken steps to ensure that the premium was paid and the policy kept in force.

The current requirement is that the policy must be in force at the date the mortgage is being draw down. Some lenders are no longer taking an assignment on the policy and it is totally up to you to ensure the premiums are paid and policy is current. However, it would be foolish not to keep the cover in place. It may be even irresponsible, if there is more than one person named on the mortgage and there are dependents.

Going back to the original question; it is my opinion that, in general, a policy that is needed as a requirement to a particular credit transaction should be on a stand-alone basis. If the requirement specifies Mortgage Protection Life Insurance, then this is what you should give the lending institution.

Before you apply for a mortgage, you should do your research on the different types of policies that are available. Too many people leave it till the last minute to fulfil this requirement. They end up buying a product that may not be suitable to their circumstances and pay too much for it. They do have the option of replacing the cover with something more suitable at any stage; and there is no requirement to buy the product from the bank or building society that is lending the money.

If you decide that you need (and can afford) additional cover, be it life insurance or specified illness cover, then you should factor in other cover that you may have in place already and any cover that may form part of your contract of employment e.g. death-in-service or salary protection.

I don’t like ‘bundling’ products together with the one product provider as the costs for each of the individual component parts may not be competitive in the overall picture. Others may disagree.

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