Life Insurance Review: Reducing Your Mortgage Costs

Life Insurance is often arranged alongside a mortgage to make sure a family is not left with a large outstanding debt if the policyholder dies. For many homeowners, this is one of the main reasons for taking out cover in the first place.

However, the type of Life Insurance used to protect a mortgage can make a difference to the cost and how well the policy matches the debt it is designed to cover. A policy can remain suitable in principle while its structure no longer represents the most appropriate way of protecting the mortgage.

This case study looks at a client who approached us for a Life Insurance review after several years of paying for a level policy against his mortgage. By reviewing the purpose of the existing cover and comparing alternative options, we were able to rewrite the policy with decreasing cover and add Critical Illness Cover, while reducing the monthly premium.

The client's starting position

Our client was a 42 year old homeowner with a mortgage of approximately £220,000.

When he originally arranged his Life Insurance, the main purpose of the policy was to protect the mortgage. If he died during the term, the intention was that the policy would provide enough money to repay the outstanding mortgage and reduce the financial burden on his family.

He had taken out £220,000 of level Life Insurance cover and was paying £52 per month for the policy.

At the time, the policy appeared to provide exactly what he needed. However, the mortgage itself was reducing as he continued to make his monthly repayments, while the Life Insurance remained fixed at £220,000.

The client had also never carried out a full Life Insurance review since taking the policy out.

We therefore looked at the existing arrangement, the mortgage it was intended to protect and whether the type of cover still represented the most suitable solution. Our Personal Protection service is designed to help clients review exactly these types of existing arrangements.

Why the existing Life Insurance policy needed reviewing

The main issue was the structure of the existing policy.

The client had level Life Insurance cover, meaning the sum assured remained at £220,000 throughout the policy term.

That can be appropriate where someone wants a fixed amount of Life Insurance to remain available throughout the term. However, in this particular case, the client's main reason for having the policy was to protect his mortgage.

His mortgage balance was expected to reduce over time as he continued making repayments. The amount of debt that needed to be protected was therefore also reducing.

A Life Insurance review allowed us to consider whether it made sense to continue paying for a fixed £220,000 sum assured when the financial commitment it was primarily intended to cover was gradually becoming smaller.

The review also highlighted another consideration. The existing policy would only provide a payout following death. If the client suffered a serious illness and was unable to work, there was no Critical Illness Cover attached to the arrangement.

For someone whose main financial commitment was his mortgage, a serious illness could create significant financial pressure even though the mortgage would still need to be paid.

MoneyHelper explains that Life Insurance can provide financial support to dependants following the policyholder's death, but the type and amount of cover should reflect the individual's circumstances.

What we found during the Life Insurance review

We reviewed the existing policy and considered what the client actually wanted the protection to achieve.

The purpose was primarily mortgage protection rather than leaving a fixed lump sum for his family on top of the mortgage.

This meant that decreasing Life Insurance was a more natural fit for the client's objective.

With decreasing cover, the amount insured reduces over the term broadly in line with the expected reduction in the mortgage balance. If the client died during the term, the policy would therefore be designed to provide cover against the mortgage rather than maintaining the original £220,000 sum assured throughout.

We also looked at adding Critical Illness Cover.

The client wanted protection that could provide a lump sum if he suffered one of the specified serious illnesses covered by the policy. This could help towards the mortgage and other household costs at a time when his ability to work and maintain his income could potentially be affected.

Following the review, we recommended rewriting the existing arrangement rather than simply continuing with the original policy.

How rewriting the Life Insurance policy changed the cover

The existing policy provided £220,000 of level Life Insurance cover at a cost of £52 per month.

The new arrangement provided £220,000 of decreasing Life Insurance cover, together with £50,000 of Critical Illness Cover, for £42 per month.

This reduced the monthly premium by £10, equivalent to £120 per year.

The key change was not simply the reduction in cost. The new Life Insurance policy was structured around what the client was actually trying to protect.

Rather than maintaining £220,000 of level cover throughout the term, the Life Insurance would reduce over time in line with the mortgage protection requirement.

The client also gained Critical Illness Cover as part of the new arrangement. This meant the protection was no longer solely focused on what would happen if he died. It also provided a potential lump sum if he was diagnosed with one of the specified critical illnesses covered by the policy.

The new premium was lower despite the additional Critical Illness Cover, although the exact cost of any Life Insurance policy will depend on the individual's circumstances and the insurer's underwriting.

The outcome for the client

The Life Insurance review resulted in several practical changes.

Mortgage focused cover. The client's £220,000 of level Life Insurance was rewritten as £220,000 of decreasing cover, making the structure more closely aligned with the mortgage it was designed to protect.

Critical Illness Cover was added. The new arrangement included £50,000 of Critical Illness Cover, providing an additional layer of protection if the client suffered a specified serious illness.

Lower monthly premiums. The client's monthly cost reduced from £52 to £42, saving £10 per month or £120 per year.

A more suitable policy structure. Rather than paying for a fixed level of cover while the mortgage balance reduced, the new policy was designed to reduce alongside the financial commitment it was primarily intended to protect.

A broader protection plan. The client now had protection for two important scenarios, with Life Insurance covering death during the term and Critical Illness Cover providing a potential lump sum following a qualifying critical illness.

The saving itself was relatively modest, but the overall arrangement was more closely aligned with the client's needs.

That was the main outcome of the Life Insurance review. It was not about dramatically changing the client's protection or reducing his cover. It was about making sure the policy was structured around the reason he had taken it out in the first place.

Could a Life Insurance review help you?

Many homeowners arrange Life Insurance when they take out a mortgage and then continue paying the same premium for years without reviewing the arrangement.

As the mortgage balance falls, however, it is worth checking whether the type of Life Insurance you have still matches what you are trying to protect.

A Life Insurance review can also provide an opportunity to consider whether Critical Illness Cover or other forms of personal protection should be included alongside mortgage protection.

In this example, the client was paying £52 per month for £220,000 of level Life Insurance. Following the review, this was rewritten as £220,000 of decreasing Life Insurance with £50,000 of Critical Illness Cover, costing £42 per month.

The purpose of the review was not simply to find a cheaper policy. It was to make sure the structure of the Life Insurance matched the client's mortgage and wider protection needs.

If you have Life Insurance linked to your mortgage and have not reviewed it for several years, Castle Stonebridge can review your existing arrangements and help you understand whether they remain suitable.

You can also read our other financial planning case studies to see how reviewing existing financial arrangements can identify opportunities to improve protection and financial planning.