Can a life policy be used as a bargaining tool/guarantee when dealing with a bank?

I have a large life policy which is assigned to my mortgage provider. The value of the policy exceeds my liability twice over.

I meet with an insurance broker today, to bring the value of my policy down, so I could have it at the same value as my mortgage.

Firstly, I could not rectify the policy without the say so of the bank and secondly the broker suggested I keep the life policy as is, as this would be a bargaining tool while dealing with the bank regarding my financial problems??

He suggested, that whilst I'm currently paying only a % of my mortgage, the capital would increase, hence ending up with a larger loan than what I started out with.

The policy is valued at double my mortgage, so to put it in a nut shell, if I were to kick the bucket, the bank would stand to clear off my debt plus some.

I am eager to drop the value of the policy as I am looking to make further cuts to my monthly expenditure but have been advised that this might not be such a good idea??

Does this make any sense?

I presume it's an ordinary mortgage protection policy. As such it has no value. If you die, your estate will be able to claim the amount covered.

When you took it out, you presumably paid for level lifetime cover. Some others took out policies where the cover reduced in line with the reduction in the outstanding balance on the mortgage.

If you have had the policy a long time, it's probably good value now to keep it.

If you have no dependents, life cover is not much use to you, but the law requires it if you have a mortgage.

If you have dependents, you probably should keep it in place.

Get a quote for reducing it. If you pay over the reduced fee to the lender, they will probably be happy for you to do so.

Are you in negative equity?

I doubt it would be any use a bargaining tool with the bank as it requires your death to be of any benefit. It might be more use to your dependents should anything happen you as at least it would ensure the full debt is cleared especially if the debt is increasing. In that event the bank would just take what is owing, the surplus would go to your estate. Bank should allow you reduce the cover to nearer the mortgage amount without too much difficulty.

The answer to your question is absolutely no.
As part of your mortgage agreement you are required to maintain mortgage protection life cover. The Bank only requires cover to the level of the outstanding mortgage. Normally this would be done by taking out a mortgage protection policy, which reduces in line with loan repayments. The option is totally up to you. having the additional cover may be worthwhile, depending on family circumstances etc. The Bank will release any excess funds to your estate, should the worst happen.
However, if you don't need or can't afford the high level of cover, cancel this policy and take out a new one appropriate to the level of the mortgage. This can then be assigned to the Bank as a replacement policy.

Thanks for the feedback guys. I had a feeling I was been spun a yarn.

44brendan said:

The answer to your question is absolutely no.
As part of your mortgage agreement you are required to maintain mortgage protection life cover.

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What can the bank do if the OP cancels his policy and doesn't replace it?

Life cover is a loan condition. In the event that a policy lapses/is cancelled and not replaced the borrower is in breach of the loan agreement. In that case the Bank are entitled to either call in the debt and/or apply an appropriate charge (depending on the penalties for breach as written into the agreement).

44brendan said:

Life cover is a loan condition. In the event that a policy lapses/is cancelled and not replaced the borrower is in breach of the loan agreement. In that case the Bank are entitled to either call in the debt and/or apply an appropriate charge (depending on the penalties for breach as written into the agreement).

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Doubt that too many mortgage payers would have the funds to pay the outstanding balance if the loan was called in. Can't see a bank repossessing a house, particularly one in negative equity, for someone not having life cover in place either. What financial penalty are the banks allowed apply?

In practice there is nothing the bank will do. They will huff and puff but in the end they will go quiet.

Brendan, property in gross negative equity, approx 200k if not more.

Time said:

In practice there is nothing the bank will do. They will huff and puff but in the end they will go quiet.

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My thinking too.

Whatever about loan conditions, I would suggest caution before letting a MPP lapse. Particularly where a joint mortgage situation applies. In the event of the unexpected death of 1 party, absence of cover could result in extreme financial problems for the spouse/partner.