Key Post "I can't afford my mortgage protection policy anymore, can I cancel it?"

This has come up a few times recently, so I thought I would do a Key Post on the topic.

1) Before cancelling it, shop around for a cheaper policy.

Many people didn't shop around when they took out their mortgage and are paying far more than they need to.

Some people have gold plated policies which are very expensive and usually not necessary.

Check if you have other life cover in place which might pay the mortgage if you die.

When shopping around, remember that the level of cover required is the current balance on the mortgage, and not the amount borrowed initially. This is particularly important if you have paid lump sums ahead off your mortgage ahead of schedule.


Remember also that the remaining term is shorter and may be shorter again if you paid lump sums off the mortgage.

2) While mortgage protection is important if you have dependants, it is a waste of money if you have no dependants

If you die while the policy is in force, your mortgage will be paid off. If you have no dependents, then this should not matter to you.

Unfortunately, the Consumer Credit Act insists that everyone must take out a mortgage protection policy. It's not clear that you must keep it in force.

3) If you are in danger of having your home repossessed, then cancelling the policy and increasing your mortgage repayment might be a better strategy.

If an unsustainable mortgage, can be made sustainable by paying the premium to the lender instead, then this is the right thing to do.

What will happen if I cancel my policy?

A If you die, your mortgage will not be paid off, so you should not do it if you have a health record

B The mortgage lender may chase you to take out a new policy. This doesn't seem to be happening too much, but if they insist, and your new policy is more expensive you could be worse off.

C In this post, Stevie C reported that a lender tried to take away a person's tracker if they did not renew their insurance. I don't think that they would have succeeded in this.

As with all insurance, there are a number of factors that should be looked at before deciding on whether you need it:

1. How likely is it that it is going to happen?
2. What is the extent that you can control it?
3. What is the impact of it happening on you and your family?
4. What is your ability to work around the impact?
5. What available strategies are there to prepare for the event?

In the case of mortgage protection, it is unlikely to happen and you probably can't control it.

The impact that it will have on you (you're dead!) and your family is massive though. As mortgages are such large debts, there are not many other options available besides insurance. Do nothing and you leave your family vulnerable to large amounts of debt on premature death. Self insurance isn't an option. If you had that type of money to put away you wouldn't have a mortgage.

Would redirecting the premium to a mortgage make that much of a difference? If the bank are threatening to repossess your home, you will be in arrears at that stage too. Mortgage Protection is relatively cheap, so I doubt it would make much of a difference. I would think that the impact of premature death and leaving a family without an father/ mother, an income and huge debt is greater. Afterall, anyone can be in an accident at any time.

Also, in reference to those level term or indexed linked policies that were sold by a lot of banks instead of the cheaper reducing cover ones; if you are in arrears, the level term may still cover the original mortgage and the arrears. If it is index linked, you can cancel the indexation.

Just be very careful before cancelling cover, I have heard a few horror stories of people who have and subsequently needed to claim on it.


Steven
www.bluewaterfp.ie

Hi Brendan,

2) Mortgage protection is a waste if you have no dependents

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I would give equal if not more emphasis to the advice: Mortgage Protection is very important if you do have dependents. Some people think that sudden death is something that only happens to someone else.

In a similar vein, I would throw in the advice that if you are replacing your Mortgage Protection policy with a cheaper model, make sure that the new policy is in force before you cancel the old.

Also make sure that you're comparing like with like. Understand what you're cancelling before you cancel it.

I don't have any dependants. In the event of my death, I still wouldn't want my wife to be saddled with paying the mortgage herself, which is why we continue to pay the mortgage protection insurance premium.

http://www.grammar-monster.com/easily_confused/dependant_dependent.htm

Check a copy of your loan agreement. It will tell you whether or not you need to maintain a suitable form of life assurance to cover your loan.

The cheapest form of life assurance to cover a repayment mortgage is a product called mortgage protection.

If you are reviewing your finances and want to see if a new policy would be cheaper than the policy you already have then remember when you are shopping around for quotes, the amount of cover you now need is not the amount you borrowed but the amount currently outstanding on your loan. Likewise the term (i.e. the number of years the policy will last for) on your new policy should be for the remaining term on your loan (i.e number of full years from today rounded up to the nearest year because you can't purchase fraction years cover).

When you get a quote remember it is just a quote and it is not until the insurer has considered all factors of your application such as your health etc and have accepted you that you will have a firm idea of a price.

If you then wish to proceed further then the insurer will issue cover to you and you will have a cooling off period in which you can decide whether or not the policy is suitable for your needs.

You then hand the new policy to your lender telling them you wish to assign (means they become the new owners of the policy) this new policy against your loan and asking them to release their interest in your old policy. Once they have accepted the new policy you are free to decide to cancel your old policy. In this way you do not have a gap in cover.

STEINER said:

I don't have any dependants.

http://www.grammar-monster.com/easily_confused/dependant_dependent.htm

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Thanks Steiner

I agree that dependants is the correct spelling, although[broken link removed] allows dependents. The spellchecker on Askaboutmoney does not allow dependants.

SBarrett said:

. Mortgage Protection is relatively cheap, so I doubt it would make much of a difference.

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Karl Deeter and Jill Kerby discussed this on Drivetime yesterday. They made this point as well - mortgage protection was so cheap "€15 to €20" a month, make sure to keep it in place.

While this is generally correct, in some cases brokers sold borrowers ridiculous Rolls Royce policies - whole of life, level term, convertible policies which are very expensive. An employee of an Arrears Support Unit estimated that he could make around 10% of unsustainable mortgages sustainable, if they stopped paying their mortgage protection insurance.

And, of course, people without dependants do not need it, so they should cancel it immediately.

I made lump sum payments off my mortgage over the years to reduce the capital owing. I could have chosen a lower monthly repayment but instead I opted to reduce the term of the loan instead.
A person's original mortgage protection is based on a mortgage reducing over say 20 years. The premium stays the same over the period but the amount owing is constantly reducing.
It might make sense, depending on a person's age to get some new quotes every few years based on the current status of the amount owing. You will be insuring a lower amount so the new premiums should be lower. Age does play a part though.
Like me if you make lump sum repayments off your mortgage and you have a bog standard policy then ask the insurance company to quote for the lower figure.

mortgage protection was so cheap "€15 to €20" a month

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Surely this depends on age of those covered, amount and duration..........or is it cheap in comparison to other death policies?

Also, does it make sense in value terms to cancel it, say 1/2 way through as premium is the same and cover is now 50% of what it was?

Kimmagegirl said:

I made lump sum payments off my mortgage over the years to reduce the capital owing. I could have chosen a lower monthly repayment but instead I opted to reduce the term of the loan instead.
A person's original mortgage protection is based on a mortgage reducing over say 20 years.

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Very good point and I will amend the OP accordingly.

While most policies are reducing balance, some people took out level cover for the full term. In other words, the amount of cover did not reduce in line with the mortgage.

monagt said:

Surely this depends on age of those covered, amount and duration..........or is it cheap in comparison to other death policies?

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Hi monagt

Agree. The examples they gave on the programme were for younger people with a €200k mortgage. I suspect that they are not the people who have the big problems with arrears.

Also, does it make sense in value terms to cancel it, say 1/2 way through as premium is the same and cover is now 50% of what it was?

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It makes sense to shop around.

A policy taken out ten years ago may be good value now if your health has deteriorated, or if it's for a level sum assured. And as you are 10 years older, a new policy would be more expensive anyway.

However, it may be cheaper to take out a new policy if you have decreasing term insurance or if you didn't shop around in the first place.

Brendan Burgess said:

Karl Deeter and Jill Kerby discussed this on Drivetime yesterday. They made this point as well - mortgage protection was so cheap "€15 to €20" a month, make sure to keep it in place.

While this is generally correct, in some cases brokers sold borrowers ridiculous Rolls Royce policies - whole of life, level term, convertible policies which are very expensive. An employee of an Arrears Support Unit estimated that he could make around 10% of unsustainable mortgages sustainable, if they stopped paying their mortgage protection insurance.

And, of course, people without dependants do not need it, so they should cancel it immediately.

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Glad you tuned in for the show! The point of expensive policies like 'whole of life' was made, that isn't broker only, that comes from any distribution channel, in particular direct sales from the Life Co's.

Level Term or conversion options are not that expensive so not sure the point is well made there - look at the cost per life on level term versus joint life first event decreasing term and you'll see that on a value of claim basis (given people die as they get older rather than straight away) and it holds that there is good long term cost of ownership versus value in them if the initial quote isn't too high due to smoking or medical impairment.

In general the issues raised in this thread are well made, but the idea of having no dependants and no insurance forgets a few things such as the complications it raises in probate (granted you'll be gone but somebody has to clean it up) and that of people who might not have kids because they can't but want to leave something to a niece or nephew - in settling the estate a house in negative equity would eat up the deposit that may have been intended for them etc.

Generally it holds true that if you have no dependants you have no need for life cover, but it isn't an immutable law like the force of gravity.

MortgageGuy said:

Level Term or conversion options are not that expensive so not sure the point is well made there - look at the cost per life on level term versus joint life first event decreasing term and you'll see that on a value of claim basis (given people die as they get older rather than straight away) and it holds that there is good long term cost of ownership versus value in them if the initial quote isn't too high due to smoking or medical impairment.

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The general point is to shop around. If your policy is expensive, and you can get the essential cover cheaper, then you should do so. In most cases, people won't benefit. But some will. Maybe it's the the smokers with a medical history who have taken out a convertible whole of life policy.

In general the issues raised in this thread are well made, but the idea of having no dependants and no insurance forgets a few things such as the complications it raises in probate (granted you'll be gone but somebody has to clean it up) and that of people who might not have kids because they can't but want to leave something to a niece or nephew - in settling the estate a house in negative equity would eat up the deposit that may have been intended for them etc.

Generally it holds true that if you have no dependants you have no need for life cover, but it isn't an immutable law like the force of gravity.

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If I have no dependants and I face losing my home through arrears, then that should be my primary concern. I should not be thinking about leaving something to my niece or nephew. Probate would not be much more complicated. The house will be sold and the proceeds distributed. There might be more if I have a life policy, but it won't be any simpler.