Were you sold insurance to “cover” your mortgage? Were you told you had to have insurance…
Patrick Collinson, The Guardian, Sat 27 Jan 2018
While income protection policies are good for the self-employed, for people in their 20s and 30s they really aren’t necessary
Were you sold insurance to “cover” your mortgage? Were you told you had to have insurance, even though you’d rather not? You may well be wasting thousands of pounds.
Our “How I spend it” column this week features Rebecca Parkin, a champion money saver, who managed to pay off her mortgage by the age of 42 and live debt-free. But she admits how as a “green” 30-year-old in 2005 she was talked into paying £174 a month for an insurance policy to cover her £85,000 mortgage. By shopping around independently, she has since found cover for £6.90 a month.
She told me it was a requirement to have insurance with her mortgage. But there is absolutely no law or regulation that says you must have life insurance, or critical illness cover, or an income protection policy, with a mortgage. That such a financially savvy woman as Parkin was conned into wasting money this way suggests that maybe millions of people are labouring under this illusion – and throwing their cash away.
In Parkin’s case, her £174-a-month policy would have generated commission worth around £4,000 to the broker who sold it. Typically, with these sorts of policies, the adviser receives between 185% to 200% of the first year’s premiums. So the incentive to push these policies is immense.
The buyers are usually young and inexperienced in financial matters. During the 1990s lenders were still allowed to insist upon life cover. But by 2005 when Parkin was mis-sold her policy, such rules had been swept away.
It has to be said that there are plausible reasons why someone should buy insurance cover when they take out a mortgage. If the borrower is self-employed and has kids with a non-earning partner, he or she would be mad not to have some sort of cover in place.
But a single person, in their late 20s, with no dependents, working for a decent employer? If they die, the financial consequences are almost meaningless: the flat or house is sold, and the mortgage company takes the money they are owed. It makes no difference that the person has a life policy in place – it’s just a bonus to any relations. What’s more, the employer may have death-in-service cover as part of their benefits package, making buying additional insurance nonsensical.
The risks of actually dying during your mortgage years – let’s say from your late 20s to your late 50s – are fantastically low. The average age for a first-time buyer is now just over 30. But the risk of a UK woman aged 25-34 dying in any one year in that age bracket is just 0.04%, while for men it’s 0.08%. Even at 54, the annual death risk for a woman is just 0.24%, rising to 0.36% in men. Once a male reaches the age of 85, the annual death risk is 16.6%, but by that time we can assume the mortgage is safely paid off. There’s a reason why pure life policies for people in their 20s and 30s – that only pay out on death during the life of the mortgage – can be found very cheaply: because they hardly ever pay out.
It is less clear-cut when it comes to critical illness or income protection policies. These pay a lump sum on diagnosis of things like cancer or guarantee an income if you can no longer work. Again, they are sensible for the self-employed, although usually very expensive. It’s almost certainly what was sold to Parkin, even though she was a single, full-time teacher with generous sick pay entitlements. You should not entirely rule out buying a critical illness policy, but for most people in their 20s and 30s, the cost is simply too high for the relatively low risk involved.
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