When 26-year-old Heather Baker and her boyfriend, Justin, bought their first home last year they used a mortgage broker to help them find the best deal.
The couple were pleased with the loan the broker found, but when it came to insurance he didn't do such a good job. 'It was really confusing,' says Heather. The broker recommended life cover, which she decided against. 'It wasn't so much the cost, it was the fact that I was almost being pressured into having something that I didn't understand,' she says.
Article continues Like Heather, most homebuyers are offered life insurance with their mortgage. But lenders and brokers frequently push a range of other policies alongside the loan, including critical illness, income protection and mortgage payment protection insurance (MPPI) - and buyers end up with insurance they don't need. So where do you start?
Unless your employer offers a death-in-service benefit, which could be used to pay off your mortgage if you die, life cover is likely to be a top priority if you are buying with a partner or have kids.
Ray Boulger of mortgage broker John Charcol suggests going for a 'level term' policy. This is life insurance that offers the same level of payout if you die at any time during the term you are insured for (usually the life of your mortgage). If you later get a larger mortgage, it is easier to adjust the amount the policy covers than if you take the other option, a 'decreasing' policy, where the potential payout falls as you pay off your mortgage.
You are not obliged to buy life cover and, if buying alone, you might not bother, reasoning that if you die the house can be sold to pay off the mortgage. But Boulger warns the issue is not that straightforward for someone who thinks they might eventually share their home.
When you are young, life cover is relatively cheap: insurance broker Lifesearch quotes a premium of just £6.10 a month for a 30-year-old, non-smoking female looking to cover a £100,000 interest-only mortgage for 25 years. However, it gets pricier as you get older: if you put off buying until you have dependants your premiums could be higher, and if you fall seriously ill in the interim, you may find you can't get insurance at all.
'Critical illness' cover is another option and is often sold with life insurance. It too offers a one-off payment of an amount you decide at the outset, but pays out if you suffer one of a list of serious illnesses (such as cancer) during the term of the policy. Because this is more likely than you dying, it costs more. For a 30-year-old woman, a combined life and critical illness policy for a £100,000 mortgage costs about £28.77 a month.
Brokers suggest buying 'income protection' insurance, which offers a regular payment equivalent to a proportion of your salary for as long as you are unable to work. 'Critical illness is great if you are diagnosed with a serious illness, but income protection will pay out whether you have cancer or a bad back,' says Emma Dupont, protection consultant at mortgage broker Cobalt Capital.
The downside of income protection is that it will only pay out for as long as you are signed off work. 'If you had a heart attack, the average time you would be signed off for is three months and your income protection would stop then,' says Dupont. By contrast, a critical illness policy would enable you to pay off your mortgage and spend longer recovering.
MPPI offers cover against illness, accident or redundancy for a flat premium, irrespective of your job or your age. This type of policy will pay out for up to 24 months, and usually costs about £5 for every £100 of the monthly mortgage payment you want to cover.
If you're looking to cover yourself against ill health, income protection is likely to be a better buy, but the redundancy element of MPPI may be useful if you live on your own and think finding a new job would be difficult.
The payment protection insurance market has been criticised in recent years, but as part of an effort to clean the sector up, the Financial Services Authority has just announced it has reached an agreement with MPPI insurers by which they will drop their controversial 'no refund' approach to policies, where a one-off sum is paid for the whole term.
Providers have agreed not to include the clauses in new contracts and to drop them from existing policies, meaning customers who cancel, perhaps because they have paid off their mortgage early, should now get a fair refund.
This is cache, read story here
