How life insurance sold on a mortgage can cost you £7,500

£7,500: The cost of the mortgage life cover

by This Is Money
Updated: 05:00 EST, March 16, 2011

Banks have been accused of selling homebuyers exaggerated life insurance when signing up for a mortgage.

Insurance sold on a £200,000 mortgage can cost up to £300 per annum with some reputable banks more than insurance bought independently.

This works out to over an extra £7,500 over a typical 25 year loan.

Basic level life insurance is usually sold with a mortgage. The borrower pays the same amount each month and the insurance company agrees to pay off the mortgage if the borrower dies.

But single people without dependents may not need this because when they die their home can be sold to pay off the loan.

And even those who need it may pay too much. HSBC quoted £38 a month for £200,000 of life insurance for a couple aged 30-35. Halifax quoted £34 a month, RBS, NatWest and Nationwide £21 a month, and Santander charged £16.

But insurer Legal & General offers similar cover for as little as £12.99 a month – a third of HSBC’s fee.

The cost was higher at Halifax and HSBC in part because banks do not offer common policies and insist each borrower buys their own.

“It’s not a good idea to accept the first insurance policy your bank offers without shopping around,” says Ray Black of comparison site Money-minder.com, who produced the research.

But the banks insist their policies are worth paying for. An HSBC spokesperson says: ‘In 2010 we accepted 99.9% of death claims. We paid our clients when it mattered.

Many homebuyers are confused by the insurance group. In addition to life insurance, they may be offered income protection and critical illness coverage. Your mortgage payments should be covered by income protection insurance if you cannot work through illness. Don’t confuse it with Mortgage Payment Protection Insurance (MPPI) which only pays for a year or two. “Income protection pays up to half of your current income tax if you are unable to work through ill health,” says Matt Morris of insurance broker Lifesearch. Income continues until you return to work, die, or the term of the policy expires.

“Most people choose this policy to start paying after they’ve signed on to work for three months.”

However, check carefully for the exceptions—some won’t pay if you make a claim soon after signing up. Critical illness insurance pays a lump sum if you are diagnosed with cancer or suffer a serious illness such as a heart attack or stroke. But insurance companies are getting stricter about payments because many diseases once thought incurable are now curable.

Be wary of lenders who try to sell you more cover than you need for your mortgage. Many people have a life cap from their employer — and in some cases, it’s possible to increase it.

Always shop with a broker or comparison site. The Association of British Insurance Brokers’ Find a Broker Line is on 0870 950 1790.

Other tricks to lower your life coverage costs are explained here.

Sarah and Michael Ferris have bought their first home in Manchester.

They avoided buying life insurance through their mortgage provider, HSBC, rather than through a comparison site.

Ms Ferris, 23, pays £13 a month with Axa. Mr Ferris, 29, has a policy with Prudential of £15 a month. Both policies would pay out £80,000 if either of them died within the next 25 years. Their premiums are fixed for 25 years, so their costs will never increase.

“I hate getting robbed, so I use comparison sites to find the best insurance,” says Ms Ferris, who works for a construction company. Now that we’ve bought our home and we have Megan, we wanted a little bit of security.

“I don’t want Mike struggling to pay the mortgage and child care if something happens to me.”