Mortgage Protection Life Insurance is designed to repay the outstanding balance of a repayment mortgage in the event of death (or earlier critical illness).
A repayment mortgage is a mortgage loan where each month the interest due and some capital are repaid.
During the early years relatively little of the loan is repaid each month with larger amounts repaid later in the term.
The Mortgage Protection Life Insurance (and/or Critical Illness) premiums are determined at outset and are usually guaranteed for the term of the policy. Reviewable premium plans are available, but again these are not widely sold. The graph below shows how the sum assured falls over the policy term in the same way that the amount of capital outstanding on a repayment mortgage falls over time.
Not all mortgage protection life insurance and critical illness insurance plans pay the same amount on claim. This is because the different insurance companies use different ways to work out how the life cover should fall over the term. There are basically two ways that are in common use.
The first method……is to assume a fixed mortgage interest rate, typically 10%, and reduce the amount of life insurance and critical illness cover in line with this assumption. This means that irrespective of the mortgage amount outstanding, the life insurance and/or critical illness insurance payable at claim will be that which would have been payable assuming the mortgage had been run at an interest rate of 10%.
You can see from the graph below that the amount payable during the life insurance term increases with interest rate. A policy that assumes an interest rate of 10%, pays more than a policy that assumes an interest rate of 5%, half way through the plan term.
Also it is worth noting that the life insurance or critical illness insurance payout is not linked to the mortgage and may therefore payout more than the outstanding balance if average interest rates have been lower than the assumed interest rate of 10%, or less if interest rates had been higher than the assumed rate. Furthermore the life insurance cover or critical illness insurance cover will be paid irrespective of whether there is a mortgage outstanding or not.
The second method……is to guarantee the repayment of the outstanding balance of the mortgage, irrespective of interest rate. This method offers guarantees but is usually subject to certain criteria. These can include, ensuring that the mortgage protection plan is set up for at least the amount of the mortgage outstanding in the first place, and over the same term. Furthermore mortgage payments must be up to date at the date of claim, which could be more of a problem if the claimant has been unable to work for a period due to ill health and has become behind with mortgage payments just before death. Under these circumstances if there is no mortgage in place when a claim is made then the policy usually works as per method one above but might assume quite a low interest rate (typically 5%) to work out the sum payable.
29 August 2007 14:39:48
UK life insurance
provider Bright Grey have responded to worrying findings regarding the protection gap by launching a free prize draw for advisers.
May research from the life cover firm found that one in three British families have no life insurance, critical illness cover or income protection, a supposed £2.3 trillion protection gap, according to Swiss Re.
To raise awareness of the importance of protecting your family's future, Bright Grey is offering £1,000 worth of holiday vouchers to all advisers who submit four or more Family Income Benefit application by October 31st, with one lucky entrant set to scoop a trip away.
Susan Sneddon, Bright Grey's Communications Director, explained: "Our family protection campaign is well underway. We are working with advisers to grow the market and make sure their clients have enough insurance in place to protect their families.
"To raise awareness and help advisers see how simple it is to quote for Family Income Benefit (FIB), we have produced support material they can use to help sell the benefits of FIB."
She added: "To keep the momentum of this important campaign, we have launched a prize draw on www.brightadviser.co.uk, which gives advisers the chance to win £1,000 worth of holiday vouchers."
The Bright Grey study found that 80 per cent of families have no critical illness insurance.
29 June 2007 09:53:59
The July 1st ban on smoking in public places could have a massive effect on life insurance premiums, according to one health charity.
Action on Smoking and Health UK (ASH) has estimated that around 750,000 people in the UK will give up smoking after the ban, with the quitters set to benefit from not just an improvement to their health, but a reduction in their life cover costs.
However, Martin Dockrell, policy and campaigns manager at ASH, said he understood why so many smokers - 40 per cent of whom intend to give up after the ban - found it so hard to kick the habit.
"Anyone who's been a smoker and tried to quit will tell you one of the most difficult things is going to meet your friends for a drink. It's ok for the first drink, but after the second drink and whenever they get the fags out…and everyone's smoking, it's much, much harder to say no."
"So what we expect is that it will be a lot easier to quit…The whole idea of' Smoke-free' is encouraging smokers who've wanted to quit for years to have another good old bash at it."
He added: "It's going to be a huge impact; of huge benefit. People start benefiting almost immediately…your circulation begins to improve, your lung capacity begins to improve, and gradually your risk of lung cancer begins to fall."
Not only does quitting smoking reduce the risk of lung cancer and other cardiovascular diseases, it'll save you money too, both in reducing your weekly outlay and through cutting the cost of your life insurance.
20 June 2007 14:34:25
Some Britons pay over two thirds more for their life insurance than other UK residents, according to a new report.
The Sainsbury's Bank life insurance index revealed that Brits who took out a policy with competitive term assurance were likely to pay 66.24 per cent than those insured by higher-end providers.
This difference was found to come to around £8.36 per month, a seemingly small sum, but one that still illustrates the importance of taking their time when buying life insurance.
Over a 25-year policy term, the customer with the cheaper policy would pay £2,508 less than their higher-paying counterpart.
Average monthly premiums were found to have dropped from £16.11 to £15.87, between September 2006 and March 2007, but the disparity between the cheapest and most expensive providers has increased from £8.31 to £8.36.
Claire Moyle, life insurance manager for the bank, said: "Although we appreciate our index is not indicative of the life insurance market as a whole, we believe it should serve as a useful reminder to people of the need to shop around."
