Insurance: Failing to think the unthinkable
Many Britons are seriously under-insured, says Kate Hughes, but it's also vital not to overpay for policies
Saturday 25 May 2013
The number of mortgages approvals across the country picked up in April, with the largest increase in lending agreements since the heady pre-crisis days of 2008. Thanks in large part to schemes such as Funding for Lending, the Council of Mortgage Lenders estimates there was a 4 per cent rise in lending to homebuyers to £12.1bn, from £11.6bn in March, in the last month alone.
That's good news for the housing market and the economy in general – and perhaps even for the man on the street somewhere down the line. But with an increase in mortgage activity comes a rise in the dizzying array of products and services sold alongside those home loans. That's complicated and confusing for most of us, but particularly for the thousands of first-time buyers – 19,000 of them in March alone – trying to pick their way through the paperwork and legal promises. And simply taking the first product offered could end up costing a fortune, especially when that product is life insurance.
Nobody wants to pay for something they hope they never need, let alone think about what would happen to their families if they died suddenly. These are the main reasons why there is a £2.4trn protection gap in the UK – with most households exposed to financial catastrophe in the event of unemployment, illness or death. However, while life insurance should be a bedrock of family finances, it needs to be purchased with care. A recent YouGov survey found that more than half of those who have bought life insurance did so to secure their mortgage repayments, keen to protect their loved ones from losing their home if they died suddenly.
But simply accepting the first policy offered could cost you thousands of pounds in the long run as the difference between the cheapest and most expensive life insurance premiums can be hundreds of pounds a month. There is absolutely no obligation to purchase the policy offered alongside your mortgage agreement. Nor do you have to stick with it if you have.
"A new mortgage is a big commitment, so naturally people want to ensure they are protecting their families in the event of a death," says Matthew Gledhill, managing director at the insurance provider Beagle Street. "For convenience, people tend to take out new policies alongside a new mortgage. This often means that they accept the first quote provided, which could be hugely inflated. But it's not too late; you can exit your life policy at any time if you find a better deal. These days it is just as important – and just as easy – to shop around for life cover as it is for home and car insurance."
But while it is often the first type of cover that springs to mind, life insurance isn't the only, or always the best, type to consider, warns Kevin Carr, chief executive of the Protection Review, which provides commentary on the insurance market. "Life cover is the most commonly bought product because it's the cheapest, but it's the cheapest for a reason," he says. "We are five to six times more likely to be alive but seriously ill [and/or too ill to work] than we are to pop our clogs, which means that products such as critical illness and income protection are more important."
It's crucial for those looking for insurance to know exactly what they'll be covered for and under what circumstances, experts warn. Life insurance is the most straightforward type of personal protection, paying out a lump sum to your family if you die during the term of the policy – the period for which you wish to be covered.
Many people base this on the age of their children and how long they would be financially dependent, for example. Premiums are calculated according to the amount of time for which you want to be insured and how big the lump sum payout would be, as well as your age, lifestyle and health
Critical illness cover is designed to ease the financial pressure if you become ill or severely disabled, or even if your children do. This cover pays out benefits upon diagnosis of one of a range of different serious illnesses. These can vary between policy providers but all should include cancer, heart attack, kidney failure, major organ transplant, multiple sclerosis and a stroke. The cost of the premiums will also depend on your state of health, lifestyle and family history. Read the small print to ensure you are clear on what is and isn't covered.
Income protection covers you in the event of an accident, unemployment or illness. After an agreed period, usually between one and 12 months, it pays out a proportion of your monthly income – every month until you retire if necessary. (This is not be confused with short-term payment protection insurance, which only pays out for a year or two and is a completely different product). Monthly premiums will depend, once again, on your age, health, the waiting period involved, and the amount to be paid out every month.
"When looking at mortgage cover, think about the cost of living in the house as well as the mortgage itself," warns Mr Carr.
"It's one thing paying off the mortgage, but the bills don't end there. Couples should always consider buying a policy each, rather than a joint one, because it is often much better value for money."
Case study: 'We would advise any family trying to reduce their outgoings to shop around for life cover'
Father of two James Samuel (34), from Kingston in Surrey, purchased life insurance and critical illness cover alongside his interest-only mortgage four years ago, paying £168 a month.
James, an exhibition organiser, and wife Monica, a physiotherapist at Great Ormond Street hospital, were spurred into shopping around for new cover after the birth of their second child. James said: "We decided to re-mortgage and move to a repayment option on our house, so it seemed a perfect time to see if we could also save money on our life and critical illness cover."
James added: "As we now have critical illness benefits through our work, we didn't need to be paying out heavily for that too, which allowed us to reduce our costs further."
The couple now pay just £20 a month for £265,000 of life insurance over 30 years, which covers both of them. The money saved on the life insurance means they can easily cover the increased mortgage payments.
"We would advise any family looking at reducing their outgoings to shop around for life cover," James says. "I really didn't think we could save as much as we did, but the money we now save means we are finally chipping away at our mortgage."
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