Buying mortgage protection insurance should be quite straightforward.
But after taking advice from the bank, your friends, your family, your colleagues and some random you met down the vegetable aisle, your head is melted.
Don’t worry, I’m here to set you straight.
Here’s our mortgage protection insurance checklist of what you need to know before you sign on the dotted line:
Before we start, let’s clear up what is meant by mortgage protection insurance or mortgage life insurance as the bank likes to call it…just to confuse you even more.
It’s a type of life insurance policy that you need when getting a mortgage. If you die the mortgage protection policy will payout to the bank to clear the mortgage.
Right, let’s fire ahead…
No, no, one million times no.
This is from the Competition and Consumer Protection Commission who tell us they are “an independent statutory body with a dual mandate to enforce competition and consumer protection law in Ireland”. Fancy or wha!
Forgive my rudimentary scribbling btw
YOU DON’T HAVE TO BUY IT FROM YOUR BANK
But beware, the bank will do everything it can to make you sign up for one of their overpriced policies. They may even resort to telling you downright lies to scare you into taking their cover
Be strong, politely decline then run, ar nós na gaoithe, out of the bank.
You need to cover the mortgage amount you are borrowing – you don’t have to worry about covering the interest payable (don’t even look at the interest payable to avoid a heart attack)
If your mortgage is €500,000 over 25 years, you need a policy for €500,000 over 25 years.
Yes, if there are two people on the mortgage, you both need cover for the full amount of the mortgage.
BTW, if you’re not married and you’re buying together, you should take out two single policies, you pay your partners premiums and vice versa. (because inheritance tax)
This confuses everyone so let me clear it up for you.
With life insurance (also known as level term life insurance), the amount of cover remains the same throughout the whole policy.
Let’s say you buy a €500,000 life insurance policy to cover you for 25 years. Your cover is fixed at €500,000. If you die at anytime in the next 25 years, the insurer pays out €500,000.
Compare this to mortgage protection (also known as decreasing or reducing term life insurance – again just to confuse you like)
Let’s say you buy €500,000 mortgage protection over 25 years. The €500,000 cover will reduce over time in line with your mortgage. If you die, the insurer will pay out whatever remains on your policy to clear the balance of your mortgage.
The minimum you need to get a mortgage is basic mortgage protection so that’s what I advise you to buy. You don’t need life insurance.
You can indeed and any balance left over after the mortgage is paid will go to your family or estate. An example will clear this up.
Imagine your mortgage is for €500,000 over 25 years.
You buy a life insurance policy for €500,000 over 25 years but pop your clogs in 20 years time. Over those 20 years you will have paid off a fair chunk of your mortgage so the balance payable on the mortgage has reduced €100,000. Your life insurance policy will payout €500,000 to the bank who will clear the €100,000 mortgage. The €400,000 balance will go to your family or form part of your estate.
Not so fast.
What if you took out the €500,000 life insurance assuming you would live a long and healthy life but then you die in a freak extreme ironing accident early in your policy.
The bank will get the €500,000 and will clear the mortgage which still has €500,000 left on it.
Your family will get a mortgage free home but no lump sum of money to replace your income.
So they’ll have to survive on one income…otherwise little Timmy is off down the mines again.
Seriously, if you have kids, always buy two policies
A : mortgage protection for your bank
B : life insurance for your family
Serious illness cover isn’t mandatory but you can add it to your mortgage protection policy if you wish.
If you add serious illness cover to your mortgage protection policy and make a claim, the bank will get the proceeds to pay down your mortgage.
Even if you need the cash for life saving surgery,
Also the serious illness cover will reduce over time if you add it to your mortgage protection policy. You’re more likely to get a serious illness when you’re older so your payout will be much less than you imagined.
You’re much better off buying serious illness cover on a separate life insurance policy to ensure you get the proceeds and to make sure the serious illness cover remains at the same level for the life of your policy.
On a joint life policy, only the first death is insured. Once the first person dies, the policy ends. If you both die at the same time, there is only one payout.
Both lives are insured independently on a dual life policy. There will be a payout on the first death and cover will continue for the survivor. If you both die, there will be a double payout.
Dual life cover is only available through brokers, your bank cannot offer it.
You’d expect dual life cover to be more expensive than joint but one of our insurers offers dual life cover for the same price as joint life, the crazy bastards.
Ok, let me try, but it is a leetle beet difficult to get your head around.
Remember, up there, I explained the difference between life insurance (where the amount of cover is fixed) and mortgage protection (where your cover reduces over time).
Adding the conversion option to a mortgage protection policy allows you to magically turn the mortgage protection policy into a life insurance policy at any time in the future.
There is an extra 5% premium for this option and only one insurer offers it – again your bank cannot offer it, the big losers.
Assigning a policy is where you make the bank the owner of your policy so they get the proceeds of a claim.
Yep, you pay the premiums, they get the moolah.
You do so by signing a Deed of Assignment (this will be in your legal pack) and by completing a Notice of Assignment (also in your legal pack that you’ll get with your mortgage loan offer).
The bank sends the completed Notice of Assignment to the insurance company where you bought your mortgage protection.
The insurer then writes a letter to your bank confirming that the bank is now the owner of your policy.
It’s very straightforward despite what your bank might say – again here’s a more in-depth article.
Assignment must take place before the bank will issue your mortgage cheque. We can arrange the assignment for you.
You can apply for cover at any time, you don’t even have to wait for mortgage approval. Once the insurer accepts you for cover, your policy will hang around like Mick Jagger until you’re ready to issue it.
Once your bank gives you a Start Me Up date for the policy, we’ll issue your policy to coincide with that Start Me Up date.
Let’s look at a practical example.
You apply well in advance and have been accepted for cover.
On Feb 16th, the bank gives you a mortgage Start Me Up (ok, enough!) date of Mar 1.
We’ll issue your policy immediately with a start date of Mar 1.
This means you’ll be covered straight away and you’ll get the policy documents well in advance so you can send them to your bank.
But you won’t pay a premium until Mar 1. Even better some of our insurers will give you up to 6 weeks free cover so you might not pay a premium until April 15th! You won’t get free cover if you buy from your bank. 😉
Are you negotiating with your lender to pay interest only on your mortgage?
If so, you need to make sure your mortgage protection policy will clear the total outstanding balance on your mortgage should you die unexpectedly.
Let’s you take out a mortgage for €500,000 paying capital and interest over 40 years.
In 20 years you should have paid €150,000 off the mortgage. If you died, the remaining balance on your mortgage life insurance policy would clear the outstanding €350,000.
However, if you paid interest only on your mortgage then on death the full €500,000 would still remain outstanding. Your mortgage life insurance policy would have reduced to €350,000, leaving a shortfall of €150,000. Before the bank releases the deeds to your home, someone needs to give them a cool 150k!
Until then the lender holds onto the title deeds of the property.
That’s a total nightmare from your loved ones you leave behind.
How to avoid this happening – buy a level term life insurance policy if you’re going interest-only on your mortgage. The cover on this policy doesn’t reduce in value so will clear the full balance even on an interest-only mortgage (assuming you make the mortgage repayments!)
Your family will avoid the nightmare scenario.
Life assurance policies are more expensive than mortgage life insurance policies. But it’s a small price to pay for the peace of mind that you have left your loved ones a mortgage-free home.
Moratorium – A moratorium gives you a break from paying your mortgage for six months or reduces your repayments for up to six months.
In this case, you can take out a mortgage protection policy but it will have to be for more than 100% of the mortgage amount to account for the six months repayments that will accrue over the term of your loan. Although the bank will give you a payment break for six months, they’ll insist you make these repayments eventually. There’s nowt for free with the banks.
Most banks will accept 102% cover but confirm this with your bank. If you are getting a €300,000 mortgage with a six month moratorium, you’ll need a mortgage protection policy of €306,000 (102% of €300,000).
I hope you find our mortgage protection insurance checklist handy. They’re the 12 most frequently asked questions by our clients (the best clients in the world) but you may have questions of your own.
Best of luck with the whole housebuying process, it can be pretty stressful so make sure you have good advisors who can make it as hassle free as possible.
If you’d like me to take a look at your personal situation and make a recommendation on the types of cover you should consider, complete this questionnaire and I’ll be right back.
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