Key Post: Mortgage & Mortgage Repayment Protection

Whats the difference between the various policies (level term flexible, fixed etc..)?
Whats the best policy if your young/non smoker and envisage trading up over the next five years? I am told that your better to go for a good policy now, when your young rather than paying a higher premium at a later date!


Thanks

Re: Mortgage Protection Policies...Advice

Hi,

Mortgage Protection, aka Decreasing Term Assurance
This is a requirement of your mortgage. It’s a policy, which will repay the outstanding balance of your mortgage in the event of your death. The cover will start at your mortgage amount and decrease over the term as you repay the principal.

Mortgage Protection with Specified Serious Illness Cover
This is a similar type of policy to the above but a claim will be paid in the event of either your death or your suffering from one of the specified serious illnesses, e.g. Heart Attack, Cancer, Stroke, Kidney Failure and others from a list issued by the insurer.

Term Assurance
This type of policy will pay a fixed amount on death, irrespective of the amount outstanding at the time. In the event of a claim any excess over the outstanding mortgage balance will be paid to your estate.

Convertible Term Assurance
Same as Term Assurance above, but the policy also contains an option to continue your cover beyond the term, irrespective of your health at that time.

Both Term Assurance and Convertible Term Assurance are available with optional Specified Serious Illness cover.

Mortgage Repayment Protection
Often confused with Mortgage Protection above due to their annoyingly similar names. MRP is optional, and covers you for an agreed monthly amount (usually roughly equal to your monthly mortgage repayment). The amount is payable if you cannot work due to illness, accident or compulsory redundancy for longer than four weeks. (Redundancy cover only available to arms-length employees, not directors or self-employed.) The claim will be paid for a maximum of 12 months.

Specified serious illness cover is of value, but it's up to you to decide if it's an option you wish to pay the extra premium for.

There's an argument that says that you should take out Convertible Term Assurance policy when you're young for a larger amount of cover than your mortgage, as you can use it when you're trading up, and the rates will be fixed at your "young" age. The argument has merit, but personally I don't agree.

Example - 25year old male non-smoker borrowing €150,000 over 25 years. Mortgage Protection €10.61 per month. Five years time he trades up and gets a new mortgage of €200,000 over 25 years. Mortgage Protection premium €13.09 per month. If he had got a €200,000 Convertible Term Assurance policy over 30 years when he was 25 years old, the poremium would be fixed at €16.03 per month. No saving here.

The above example falls down if the ages are different, or if our man has dependents in which case the excess of life cover is of value to him. It all falls down seriously if he becomes gravely ill between the age of 25 and 30, in which case he cannot get a new mortgage protection policy when he wants to trade up.

So my point is that no easy rule of thumb applies to every situation - examine the options.

Liam D Ferguson
www.ferga.com

Make sure you're comparing like with like, i.e. amount of cover, type of cover (level or reducing), optional benefits (e.g. specified serious illness cover, hospital cash etc.), fixed or reviewable premium, cash value on policy.

Also - make sure the new policy is in force before you cancel the old.

Liam D. Ferguson
www.ferga.com

Flexi Life Cover with Serious Illness Cover

Hi,
I am trying to review our life assurance cover and reduce our outgoings. I am very confused about what is worth it and who the money goes to in the event of a claim.

We (both aged 35, non-smokers) have a joint life flexi life cover of 220k for a further 22 years with a conversion option and accelerated serious illness cover costing €138 p/m. This is reviewed every 5 years and the funds in the policy are used to keep the premiums level. We would like to make an encashment on this policy and reduce the level of cover to try to keep the premiums around the €140 mark. I have managed to get a quote to do a partial encashment and reduce our cover to €192k.

I have looked at other policies that provide for reducing balance mortgage protection and serious illness cover that only cost €75 a month. If we switch to this policy we will be able to encash the full fund value in our current policy. Would it make more sense to stay with our policy or change it to one costing about €75 p/month?

We now owe 192k on our mortgage and have 2 kids.
Any/all advice is welcome.

Also, if we chose mortgage protection with serious illness cover, who does the claim amount get paid to upon the event of a serious illness? i.e. us or our mortgage provider.

Many thanks.

IS the 220k to cover a mortgage?

Yes you can do a full encashment and that would be the general advice. You should have a basic mortgage protection policy to satisfy the bank (192k) and then a personal life insurance policy to provide an income to replace the income lost on death.

The amount of life cover you need will depend on your own circumstances and how much income will be lost on the death of you or your partner.

If the mortgage protection and serious illness cover are assigned to bank then they get the proceeds. If you want serious illness cover to be paid to you then have it as part of your personal life insurance policy.

Hi Norfbank,

Thanks for the quick reply. The 220k was what we owed on our mortgage 5 years ago when the policy was last reviewed. We now owe 192k and were planning on reducing the level of cover. We just don't know whether to stay with the flexi plan we have or to go with a fixed term instead. I think we'll probably cancel the cover we have and choose a basic MIP for the bank and get a separate life cover with SIC for us. Hope it doesn't work out too expensive.
Thanks,

You're welcome.

New Ireland are introducing a new product next week that should shake up the life insurance market so it would be wise to wait for that before you make a decision.

I have a policy with Aviva that I took out 5 years ago using PrimaFinance as my broker. They appear to have ceased trading so I rang Aviva directly & I have to send on a letter to them to authorise the use of another brioker on my account. All a bit painful but nevermind that.

Reason I was ringing in the first place was to get a reduction on my premium as I quit smoking over a year ago. The policy is a Term Assurance policy & the customer service agent told me the policy is fixed, meaning I can't make any changes. Currently paying €75 per montyh for a joint policy paying out €280k upon either of us dying. I'm 36 & my wife is 35. At the time we took out the policy we both smoked. I'm off them over a year & my wife has not smoked for 4 months so hopefully she will continue to suceed in kicking the habit too.

TBH I have no idea if thats a good or bad premium or what.

I was however thinking it should be relatively straightforward to get an improved premium because I've quit smoking. I'm now beginning to think changing is more hassle than its worth.

Am I paying over the odds for this policy ?? What are my options ? Any help is appreciated.

If someone takes out a policy when they're a non-smoker and gets the cheaper rate, then subsequently takes up smoking (or perhaps returns to smoking) the insurance company can't increase their premium. Equally, if someone takes out a policy when in good health and later develops an illness, the insurance company can't increase their premium.

But that cuts both ways, which is why most insurance companies won't decrease a premium on an existing policy if someone gives up smoking.

You don't mention the expiry date of the policy. If I assume that it's 25 years from now, a replacement policy covering you for €280,000 in the event of the first death would cost under €58 per month if we take your wife as a smoker or under €42 per month assuming she's a non-smoker. She gets considered a non-smoker once she's off the cigarettes for 12 months. Quotes assume that there are no health or other relevant issues that might impact the premium.

Your new broker should discuss the actual requirement for cover with you, e.g. where does the figure of €280,000 come from?

Liam D. Ferguson

Thanks Liam for that useful insight. Makes alot of sense when you put it like that. I may just leave it for now.