Life Assurance for Repayment Mortgage

Decreasing Term Assurance? Or straight Term Assurance, as the current interest rates probably make the difference in premiums rather marginal?

When you say life assurance, I take it you mean endowment policy, since the insurance and savings elements are usually inseparable. Remember that just because the original mortgage loan is no longer in place, the policy will still pay out £150k (minus any shortfall due to performance not matching optimistic forecasts) if you keep it going.

Eh? Surely the difference would be bigger for low interest rates.

In message , Lois writes

Whilst Doug and Ronald argue about the rate of decay on decreasing term assurance, can you explain this sentence please. Is the 'life insurance' to which you refer provided by the original endowment or by a new policy?

Yes, it should due to the quicker capital repayment. Brain must have been inverted. :(

Er, no - sorry, I realise that I have not been very clear in what I have written...

My last mortgage on my last property was an endowment policy. That mortgage was for about £79,000. I haven't cashed in that endowment yet: it still has 20 more years to run, my inclination is to cash it in (since I am under the impression that endowmwnts are not particularly good investments...), but I only moved just before Christmas, so haven't had time to sort it out yet...

I now have a new property and a completely new mortgage with a different lender. This new mortgage is for £150,000. It's a repayment mortgage and we have no endowment policy on it. However, we do have life assurance (which has no "with profits" element - we pay the premiums, but get nothing back afterwards...). Are we being completely mad here?

Lois

Think twice before doing this. You've passed the period where most of the premiums went into the sales commission box, so future premiums should show a reasonable return. Part of the reason endowments are not so good is the fact of these up-front charges, but that makes them a not-so-good investment only at the point where you're deciding whether to go for one, not at the point where you're deciding whether to keep it. Also, the policy already has £79k of life cover included, so basically your new £150k life-only policy brings your cover to, well, £79k more than you need.

Well, if you decide to keep the endowment, it would be worth cancelling about half the new policy because you're over-insured -- lots of incentive for murder. :-)

To return to your original question, if you were sold the life cover at the same time as the repayment loan, chances are it's already of the "decreasing cover" variety. You don't need to reduce the premiums as the loan balance decays, because the premiums are already averaged out to take decreasing cover into account, combined with the crystal ball mortality risk associated with your ages.

By the way, is your new mortgage over 20 years or 25?

"Ronald Raygun" wrote

This also means that in the last few years, when the amount being covered has fallen to almost zero - altho' you are still paying the full initial premium - you'd be paying more than the value of the cover you are getting; it could be worthwhile cancelling the policy and having a (say) 5 year term assurance for the last 5 years for a much lower amount instead ... :-)

Absolutely not. The 5 year term assurance would be very expensive, because the risk of death increases towards the end of the 25 year period. In effect the bulk of the cost of 25-year cover covers the risk of dying in the last quarter or so of term, because the risk of dying earlier is -realtively speaking- negligible.

In message , Tim writes

I cant be sure of the exact position today, but a few years ago one major player in this field recognised this by giving the last few years cover free of charge, i.e. they didnt collect the premiums for the last four years on a 25 year policy.

"Ronald Raygun" wrote

Depends very much on your age!

After a little number-crunching, it appears that a major determinant is "age at end of term". If this is much below about 50 (eg 23 year-old taking out a 25 year term, or a 27 year-old taking out a 20 year term) then it could make sense to "cancel&restart" for the last 5 years.

The younger the person, or the lower the term, or the shorter the period at the end that is "insured again after cancelling", then the greater the reduction in premium for restarting the last few years ...

"john boyle" wrote

Yes - that's why I knew of this phenomenon. In years gone by when I used to calculate life assurance premiums at an insurance company(!), the last 5 years of the DTA policies had no premiums charged ...

This got me wondering how many people take decreasing term assurance now anyway, and whether there is any point due to the low cost of term assurance? I got 100k of cover at age forty for 25 years for 12.60 a month. I cancelled a policy that had been running for 2-3 years for 40k at over a tenner at the same time.

So my opinion would be that TA may be just about as cheap and then you don't have to worry about reductions.

Companies do funny things when setting rates sometimes. I had a brief sojourn as a Financial Adviser. The company I worked for introduced new keener rates on life insurance for amounts over 100k.

One customer I had needed 87k of cover which worked out more expensive than

100k on the new rates. I tried to sell him 100k on the basis it was cheaper and gave more cover, but the company were quite upset at this. Eventually the compliance department became involved and they agreed I could oversell on the basis of price.

Neb