Don't be a prisoner in your own house

Here we show how to choose the right policy at the right cost, whether it's for your home, your health, your mortgage or your motor car; You are free to go where you like for most forms of home insurance, writes Abigail Montrose

Buying a home always costs more than originally estimated. No matter how carefully the sums are done, additional expenses crop up and you go over budget. In many cases this is unavoidable, but one thing to make sure of is that you are not overpaying for any cover the mortgage lender insists you take out.

If a mortgage exceeds 75 or 80 per cent of the value of the property, most lenders charge a mortgage indemnity guarantee (MIG) fee. This is used by the lender to buy insurance against you defaulting on your mortgage payments. It is purely for the lender's benefit but paid for by you, and can add pounds 1,000 or more to the cost of a mortgage. Not all companies make this charge - notably C&G, the former building society now owned by Lloyds TSB, and Direct Line - but where they do, you must pay it.

However, other types of compulsory insurance can usually be bought elsewhere. For example, most lenders will insist you have sufficient life insurance so that the mortgage can be paid in the event of your death.

If you take out a repayment, PEP or pension mortgage, these will not include life insurance as a matter of course (unlike with an endowment mortgage) and you may well find it is cheaper buying this cover elsewhere. Check if you already have sufficient life insurance. For example, many companies offer death-in-service benefits to their workforce, and this may be enough to cover your mortgage.

If you take a repayment loan, you can keep premiums down by buying decreasing term assurance. With this, premiums are set at a fixed amount for the term of a mortgage. As you pay off the loan so the amount your policy would pay out falls - and hence the overall cost.

The alternative is level-term assurance - often described as basic life insurance. This costs more because the sum insured (the potential payout) remains the same throughout the term. So while the outstanding mortgage falls over the years, the level of cover provided by the insurance does not. If you have an interest-only mortgage, perhaps using a PEP or pension plan to pay off the amount borrowed, level-term insurance may be pushed at you.

Premiums vary hugely between insurers so you should shop around. While a pounds 3 or pounds 4 a month disparity may not seem much, over the 25, 20 or even 10 years of a mortgage, the difference is enormous. So check periodically whether you could get a better deal elsewhere.

As well as the traditional insurers, a number of direct companies such as Virgin and Direct Line sell life insurance. Or if you do not have the time to call various life insurers yourself, you can go to an independent financial adviser who will do the legwork for you. IFAs will either charge you for this service or receive commission from the life company whose policy they sell.

All mortgage lenders insist on buildings insurance - a type of cover that has become big business for the banks and building societies. In many cases you do not have to buy the insurance that lenders offer but they may charge a fee, typically pounds 25, if you go elsewhere. They justify this by claiming it costs more in extra administration as they have to check the arrangements with a recognised insurer. They also take out contingency insurance in case there is any problem with the other insurer paying a claim.

However, paying this fee may still be worth while as the savings can amount to more than 30 per cent of the premium. In fact, many insurers will pay any switching fee if you give them your business.

Direct lenders insist they can usually offer the cheapest insurance because their overheads are low and they do not pay middle men. Insurance brokers point out that they can scour the market for the cheapest deal and negotiate competitive premiums.

Your address matters most when it comes to which insurer will offer the best deal. Furthermore, live in the wrong area, such as one suffering from subsidence, and you may find that your mortgage lender offers the only deal.

Home contents insurance is not compulsory but it is advisable. Like buildings insurance, the potential savings from shopping around are huge.

The same goes for accident, sickness and unemployment insurance (ASU). Costs vary as does the cover. When comparing policies, you should check how long you have to be off work before any payment is triggered. Some do not pay for the first 30 days you are off work or unemployed, with others it is 60 days. You also need to check how long the cover lasts as it can be as low as six months.

Finding the best deals requires effort, but the savings can be enormous. If you don't have the time to spare, you can use an IFA or insurance broker and just call the direct insurers yourself.

If you are looking at special mortgage deals, it is worth checking if they are subject to your taking the lender's insurance. Moneyfacts gives this information in its monthly magazine, and also has the details on its daily mortgage fax service (0336 400239) which costs around pounds 5. Moneyfacts offers a free copy of its magazine to readers who call it on 01692 500677.

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