Ask Gareth Shaw: Do I really need to buy the life insurance my mortgage adviser is pushing so hard?

Question: I’m in the middle of buying my first property with my wife on a 95 per cent mortgage. My mortgage adviser is pushing quite hard for me to buy life insurance alongside my loan. Do I really need to buy it now?

Protection insurance is often deprioritised as an unnecessary expense when facing the mounting costs of a house purchase

Answer: Protection insurance – which covers the likes of life insurance, income protection and critical illness insurance – is one of the most important financial investments you can make. But it is often deprioritised by people as an unnecessary expense, especially when facing the mounting costs of a house purchase. Another direct debit to add, on top of the buildings insurance, ground rent, services charges and myriad of other bills you need to make.

Research published in March by price comparison giant MoneySupermarket found that 59 per cent of homeowners have no life insurance. And, should the worst happen, that could potentially leave millions of people in serious financial trouble without a partner to help them meet repayments.

The ‘protection gap’ has been a well-worn issue in the financial industry – and because many people don’t prioritise protection, it is often said that this type of cover is ‘sold rather than bought’, taking someone like your mortgage adviser to persuade you that it is the right thing to do.

On the face of it, that might sound like an unsavoury practice, but your adviser will be regulated and have a suite of hoops to jump through to ensure that he is treating you fairly and not pushing you towards an inappropriate product. But while advising you, he will be obliged to inform you of the importance and benefits of protection insurance.

Let me state the thing many of us don’t want to confront – could you afford to pay the mortgage if your wife were to die and you only had your income to live off? Would repaying the mortgage from your own salary leave you with no or very little disposable income? Would this be the same for your wife?

You’re taking out a 95 per cent mortgage, where the rates are currently around four per cent. With a £250,000 mortgage over 25 years, you’re looking at monthly repayments of around £1,300. With a mortgage of £400,000, that could be more than £2,000 a month.

Presumably, you and your wife’s combined incomes are being used to calculate how much you can borrow. Were one of you to pass away, you may find that you aren’t able to remortgage because you only have one salary, leaving you on an expensive mortgage that you cannot move away from.

So, let’s talk about your options. The simplest would be to purchase something called ‘term’ life insurance. This means you are covered for a fixed period – usually aligned with your mortgage term. So, if you’re taking a mortgage over a 30-year term, your life insurance would end after 30 years.

Your broker may also recommend ‘decreasing’ term insurance. As the name suggests, the payout your family would receive with decreasing term insurance gets smaller over the term of the policy. This tends to be a popular option with those who have a large debt to pay off, such as a mortgage, as the payout falls in line with the money needed to clear the outstanding loan.

There’s another way to reduce the costs. While you can take out a term life insurance policy as an individual, there is also the option of taking out a joint policy with your wife. You’re both covered but there is only one payout, which is generally after the first partner dies – as a result these policies are generally cheaper.

If you decide to start a family, that should be another trigger for more cover – policies like family income benefit insurance will pay a monthly sum for a fixed period (usually until your child reaches a certain age), while increasing term insurance would pay out a lump sum which rises each year with inflation, to keep up with rising costs in the future.

Your adviser should also tell you to put a life insurance policy in ‘trust’. This will ensure that you avoid any unwanted tax surprises and makes the probate process much swifter. You can find out more at which.co.uk/lifetrust.

Gareth is the Head of Money at which.co.uk