The housing loan lender is obliged under the Consumer Credit Act 1995, section 126(1) to arrange at least one group or block policy with a life company to cover those borrowers who do not have their own protection cover.
The lender is the legal owner of the policy however the cost of each borrowers cover is passed on to them by means of increasing their loan repayments accordingly. While the lender is obliged to attempt to cover all its housing loan borrowers there are some exceptions allowed under section 126(2) of the Consumer Credit Act 1995.
a: when the house under loan is not intended to be the principle residence of the borrower or their dependants.
b: borrowers who are not acceptable to the insurer or would only be acceptable at significantly higher premium rate than normal (i.e. high risk individuals or are in bad health).
c: borrowers who are over 50 years of age at time of loan approval.
d: borrowers who at the time the loan is made have sufficient life assurance cover that can be assigned to the lender as security for the housing loan.
In the case of joint borrowers the group policy will either; cover one borrowers life or cover both on a joint life first death basis, this means the policy will pay out in full on the first death of one of the borrowers. The group cover is not “interest rate sensitive” which means that the borrower is covered for the principle outstanding on a year to year basis regardless of changes in the loan interest rate.
If the group policy pays out more than is needed to pay off the balance of the loan, the surplus will be passed to the surviving borrower or the estate of the deceased of a single borrower. Most group policy’s will not cover arrears, so there could be a shortfall in cover should there be arrears outstanding at time of death of a borrower. This debt will fall to the surviving borrower or the deceased’s estate.