Alternative home loan protection options could save you cash
Borrowers are under no obligation to purchase their mortgage protection policy from the lender, writes Laura Slattery.
Securing a mortgage can be a stressful process for first-time buyers, who are usually just so grateful to the lender that they make life easier for themselves, consenting to the lender's kind offer to arrange mortgage protection insurance and home insurance for them.
Banks and building societies require borrowers to take out a protection policy over the term of the mortgage that will repay the mortgage in the event of the borrower's death. But there is no obligation to take the policy out with the lender's insurer of choice.
Borrowers are free to look elsewhere: but do they? No, say brokers, who feel they are missing out on their share of the market because of aggressive marketing by lenders. Consumers, too, may also be losing out if their lender's insurer has a higher cost policy.
"A lot of people go to the bank, they complete the application form and think 'gosh, we're so lucky to get this loan, we better sign up to the mortgage protection insurance' and they forget they have the right to look around," says Mr John Geraghty of LA Brokers.ie.
For example, if you are taking out a mortgage with Permanent TSB, IIB Homeloans or Irish Nationwide, you will be offered mortgage protection cover from Irish Life - not the most competitive provider in the market, according to a survey by LA Brokers.ie (see table).
The savings people can make by getting a more competitive policy elsewhere can be used to accelerate repayments on the actual mortgage, Mr Geraghty adds. And as life assurance costs have decreased over the years, borrowers may still be able to find a cheaper policy, despite being older than they were when they first bought their house.
Mortgage protection premiums depend on your age, sex, whether you smoke or not, the amount of cover you require and over how many years it is required. The insurance pays out if either of the named policyholders dies during the term of the policy.
Banks and building societies offer a block policy, so if borrowers want to switch lender at a later date, they won't be able to continue with their original policy. If, at this time, the borrower's health has deteriorated, he or she may find it difficult to find new cover.
Although most insurance companies offer specially tailored products, mortgage protection insurance can be any life assurance policy where the amount of cover equals the value of the mortgage and where the length of the policy equals the length of the repayment term.
"People should separate their own needs for personal life assurance from settling a liability," says Mr Geraghty.
In other words, term insurance, not the more expensive whole-of-life cover, is the type of insurance borrowers actually need. Under term insurance, the life cover decreases over the term of the policy as repayments are made, so it continues to match the value of the outstanding mortgage.
If you take out a mortgage protection insurance independently, the policy is "assigned" to your lender, meaning the lender will have first call on the proceeds in the event of a claim.
If there is any surplus after the clearing of the mortgage, this amount is paid to your next of kin.