Caution: I am not advising that anybody breaks their mortgage contract, or does this, it’s just an interesting ‘what if’ because we are seeing more people cancelling their life assurance in order to make ends meet.
When you take out a home loan a standard condition is to have a life insurance policy in place and to have it assigned to the lender. This comes about from S126 of the Consumer Credit Act 1995, and while there are some exceptions as listed in S126(2), the majority of home loans have a policy in place.
When you take it out you then get a deed of assignment, meaning you are paying the policy but the bank is actually the beneficiary. In practice, if you die, the bank gets the insurance policy and if there is any money left over afterwards it goes to your estate.
If you went directly to your bank to get a loan chances are that you have the insurance ‘all in’ where you got sold an own-label product and usually this is lumped in with your monthly repayment. Often this gives a fairly opaque impression of what your mortgage repayment actually is, but if you went to a broker then you will have a separate direct debit for your life cover.
Meaning the lender can’t force you to pay it the way they can when it is ‘in’ your mortgage payment (the only way to do it in that case is to stop paying your mortgage!). We have seen people cancelling their life cover in order to make ends meet, because even with the minimum level of cover it is too expensive for them.
Which got me to thinking, what if you could have cover in place that is cheaper somehow?
While not having life cover is a breach of contract, it isn’t one that a lender will repossess you for, because we have seen the paper trail I can say that it goes something like this, a few letters come out stating the following:
1. You are meant to have life cover
2. You need to take one out and assign it to the bank
3. You are in breach of your terms and conditions
4. If one of you die your loan will not be cleared, this is a risk to you
5. Please take out life cover and send it to the bank
What comes next? Another letter of course! But in the long run nothing happens in any of the cases we have seen. That doesn’t mean you ‘shouldn’t’ have cover, because it is a risk, a big one at that, however, what you could do is take out a policy and NOT assign it to the lender which opens up some options.
Such as taking out pension term assurance policies, this is a type of life cover where you actually get tax relief on the premiums! Meaning it can be 41% cheaper than a ‘plain vanilla’ alternative. You can’t assign it – so you’ll be breaking your contract on an ongoing basis but if you let the lender know you do have some cover (just not assigned to them) they tend to back down over time.
If you are in a couple then you each have to take out your own, there is no ‘joint life’ pension term assurance. And best of all? Even if you don’t have a pension you can take out this insurance, it’s one of the nice things about how the system works.
So again, I’m not saying you should cancel your insurance and get a like for like product that is up to 41% cheaper, what I am saying is that if you can’t pay your life cover due to the cost of it but you might be able to if it was cheaper and in doing so lower your financial risk then this is potentially a way to do it, granted you’ll be playing the system but it’s a case of play or be played for some people and if you can reduce your risk (where circumstances dictate that you can’t continue in your present guise) then it’s an option.