Homebuyers snared in life insurance trap

Published 31st Mar 2010

High Street banks are charging homebuyers twice as much for life insurance as they would pay if they bought it independently.

The rip-off can add more than £2,500 to their bill over the life of the mortgage.

Term insurance is essential for homebuyers: it pays off the mortgage if you die early. But it is a simple product and should cost just a few pounds a month.

Erica and David Oliver

Erica and David Oliver have recently switched to cheaper term assurance from cover with HSBC. They have just sold their home in Kent and bought a three-bedroom semi detached house in Bournemouth.
Erica, who works in sales, says: 'We had to move off our good tracker mortgage deal with HSBC, so our repayments increased. We were looking to save money elsewhere.'
They approached mortgage specialists London & Country, which found them a new loan with Nationwide and reviewed their term insurance.
They now pay £13.23 a month for £197,000 cover over 35 years with Legal & General after re-jigging their insurance cover, cutting their cost by £8.49 a month, or £3,565 over the term.

Insurance, for a male aged 30, covering a £150,000 mortgage, costs just £7.73 a month if bought directly from insurer Legal & General, or £8 from Aviva. But HSBC charges £17.05 a month for the same level of cover and state-owned RBS charges £15.95.

Over the course of a 25-year mortgage HSBC would charge £2,796 more than L&G for providing exactly the same protection. David Hollingworth at mortgage specialist London & Country says: 'The difference in cost is eye-watering. This is just straightforward life cover where the main factor is the price.'


HSBC says it is more expensive as you can be accepted for cover of up to £250,000 in a matter of minutes rather than the weeks it claims it would take a standalone insurer to agree a policy.

Term assurance comes in two main types: level and decreasing. Level term keeps the cover at the same amount until your mortgage is paid off. It is best for homebuyers who have an interest-only mortgage. With a decreasing term plan, the cover reduces in line with your mortgage repayments.

Couples need a 'joint life policy' which will pay out to the survivor if one dies before the mortgage is repaid.
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Rather than just taking the policy on offer from their mortgage lender, borrowers can look for a better deal elsewhere directly from an insurance company. And as the cost of term assurance has been falling, homeowners who already have insurance could save money by switching to a new insurer.

But be wary of swapping if you have developed an illness since taking out the policy, because a new one may cost a lot more.

Emma Walker, from money supermarket.com, warns: 'Don't cancel an existing policy until you have a new one. And make sure you get the right cover.'

Some term policies also have 'add-ons', such as critical illness cover, which pays if you suffer from a life-threatening medical condition. These policies vary widely and the level of cover is reflected in the price.

Some basic policies cover you only for cancer (excluding less advanced cases), a heart attack (depending on the severity) or a stroke. Others are much more extensive. You can also buy cover which pays out if you are diagnosed with a terminal illness and have typically less than a year to live, regardless of the cause.

If you take the policy on offer from your lender, you are restricting yourself to the level of cover it offers, which may not suit you. You can do better by going through an insurance broker.

Source: ' Daily Mail '

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