• Dean Bowden

Life Insurance… What a waste of money!


Did that heading catch your attention? This blog will look at why life insurance isn't a waste of money and what causes you may require looking at this type of Insurance.


When looking at life insurance options, you typically hold three reasons for taking this type of cover out mortgage-related, personal life related, and business-related. We will concentrate on the first two reasons, mortgage and personal life-related, through this blog.


Before moving on to each point, I always make my clients aware that 'Insurances are not compulsory, but strongly advisable'.





How does life insurance help with a mortgage?


You will notice that I will keep referring to two people rather than one when talking about life insurance for the mortgage. The reason behind this is simple, the death of a single person with no dependents doesn't require life insurance in my eyes. A single person does not need to provide for a partner, spouse or child or children after you have passed away. However, some single clients do like to leave the property to close family members or friends, and life cover can be utilised for this situation.


When looking at a joint mortgage application, life insurance is in place that should either of you pass away during the mortgage term, the balance of the mortgage cleared, and the home becomes mortgage-free.


However, there have been so many times I have arranged a mortgage, and clients have decided against taking life insurance out. Now, this could be for multiple reasons, and some of the reasons heard during my time advising on insurances are;


o We can sell and move back in with family

o We are young, and it won't happen to me, so we will think about it when we're older

o We have death in service through work

o We can't afford it

o Our families would help out

o It will never payout


All of the above may be valid reasons for not wanting to take out life insurance. Still, if we look at a couple of the scenarios, we can find reasons why the life cover is an essential part of a mortgage and why some of these reasons may not be a reliable method to ensure a mortgage is cleared on death.


o We are young, and it won't happen to me, so we will think about it when we're older


Statistically, the younger we are, the less likely we are to pass away, as the average age for males is 82.3 and for females 85.8. However, this isn't to say it can't happen to younger people. What you need to consider is, should it happen do I want my partner/family to take on the mortgage debt and maybe need to sell the home as they can't afford the mortgage payments on their own. The other factor is the younger we are, the cheaper the cover is, so taking the cover out later will only make it more expensive for you.


o We have death in service through work


Death in service is an added benefit that employers may offer within the employment package to staff. However, the employee could alter this level of benefit at any time. For example, you may join on 6-times your salary payout, and a few years later, they change this to 3-times salary. You may also look at a new job that doesn't provide this with the package, or you may even decide to go self-employed.


When looking at the other reasons provided for not wanting life insurance, we can look at simple questions that may make you think about taking life cover;


o We can sell and move back in with family

Do you want to lose your independence, and can your family provide housing for you?


o We can't afford it

People are willing to pay £50+ for the latest phone or £300 per month on a nice car, and I have even seen payments for £60+ on pet insurance. Are these more important than leaving the home mortgage-free and not needing to be sold?


o Our families would help out

They may be able to help out now, but what if their situation changes when you need help?





How does life insurance differ when taking it out for personal reasons?


When looking at personal reasons for life insurance, we usually look at a family setup or providing for dependants after the policyholder passes away. Personal life cover is just as important, if not more critical, than mortgage life cover. All families require personal life cover regardless of whether they have a mortgage or are in rented accommodation.


In 2020 Child Poverty Action Group (CPAG) ran a report and published the following;

The basic cost of a child, from birth to age 18, was £71,611 for a couple family and £97,862 for a lone-parent family. If housing and childcare costs are added, these rise to £152,747 and £185,413 respectively.


Let's take a look at the following scenario;


Husband, wife, and 2-children, living in rented accommodation.


The wife works full-time, and the husband is self-employed and works around looking after the children. In this scenario, you may need to look at life insurance for both parents as if either of them passes whilst the children are still dependent, they would have a loss of income to the home. The death could cause financial difficulty in raising the children, considering the figures published by CPGA as the single parent would have the cost of 2-children and rental payments to make every month. In this scenario, you could look to have a life cover that pays out a lump sum to the surviving partner, and the payout would help offset the loss of income and support the upbringing of children and general living costs.


You may also look at this as if the above clients own their home rather than renting. I hope the clients have taken out mortgage life cover and personal life cover in this scenario. Personal life cover would then ensure that the home is owned outright on death, and the personal Insurance would be in place to help raise the children as that is still a significant cost on a single person's income.



What is the cost of life insurance?


Life insurance can vary in cost as it all depends on how much cover you take, for how long and your medical history. However, the cost of Insurance starts from as little as £6 per month, but my question to you would be 'think about what the cost would be if you didn't have this in place because the financial hardship would be far more than £6 per month.


When it also comes down to the conversation on cost, I always explain to take an amount that you are happy with as if you commit too much at the start, you will end up cancelling it, as you have never been comfortable with the monthly payments. Then you will have no cover again.





It will never payout, and it's all a con.


Many people will be thinking, 'It will never payout, and I would rather put the money into savings each month'. Firstly, in 2020 Aviva paid out on 99.3% of the claims made. There will be a few reasons why the small percentage didn't payout, such as incorrect information provided within the medical questionnaire excluded medical conditions set out from the start of the policy. Secondly, let's say that you took a life insurance policy for £200,000, and it costs £40 per month. If you saved £40 per month, it would take you 5,000 months which is 416.66 years.


Now you may only have the policy in place for 2-years and need to make a claim, and this means you would have gained £200,000, and it cost £960. Yes, you have lost a loved one, but they would have known that you are financially secure with the money left behind.



Overview


If you have read down to this part, I hope you can see that I have that life insurance isn't a waste of money, and you now see the need for this within your personal life.


Mortgages and families are significant financial commitments. We all need to ensure we have the right things in place for our families, and should the worst-case scenario happen, our families are financially secure to continue with life. They will also remember you provided for them when alive and on your passing away.


You can gain mortgage insurance through many avenues such as online, banks or building societies or using a broker. However, my other major part of advice is to make sure you take a policy with a reputable insurance company and not just go for the cheapest policy you can get find.


You can also use an independent website called Defaqto to determine how your insurance policy is rated and if it covers what you thought. Defaqto rate insurances on facts, not opinions.



Please remember protecting your mortgage, your family, and yourself is not law but strongly advisable.


What's more important, the shiny new phone, the flash car sitting on the drive, or your family's security? I hope you think 'your family', so do the correct thing and ensure you have life insurance.




Links to websites;


https://cpag.org.uk/policy-and-campaigns/cost-child

https://www.defaqto.com/

https://www.aviva.co.uk/insurance/life-products/life-insurance/paying-out-when-you-need-it/

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