Example
Cheap mortgage protection reviewed!
Take a couple, both aged 30, who are buying their first home and need a mortgage protection policy as a condition of their loan.Assume cover amount is €250k over 30 years
Analysis
The cheapest mortgage protection cover available is €22.25 .( figures as at September 2010) .Under a mortgage protection policy the level of cover reduces in line with the mortgage balance.If one party dies the life insurance company will pay off the mortgage.Quite often a no frills basic mortgage protection policy is the policy to go for.
Should they choose this policy ?
For €8.50 extra per month they could take out a level term policy where the €250k cover will remain constant over the 30 years ,
For a further €2 per month the policy will pay out on both the death of the first party and the second party.
Is it worth €10.50 extra per month for the additional cover?
Assume they take out the mortgage protection policy and decide to move home after ten years.
Some policies allow for an upgrade of your existing mortgage mortgage protection policy, if you change house during the term of the policy,subject to certain limits (eg the increase cannot be greater than 50% of the original mortgage or €100,000,whichever is less)
If they do not have a policy with an upgrade feature or if they exceed the upgrade limits, they will need to take out a new policy which could be significantly dearer because they are older and may indeed be loaded if their medical circumstances have changed.
Had they taken out a term policy in the first instance (for the extra €8.50 per month) and assuming the new mortgage term is 20 years(30-10) they could use this as security for their next mortgage.
There is no simple answer as to what is the right decision.
But cheap may not always be best!
