A Guide To Life Insurance - The Rate Of Interest ....

 

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The Rate Of Interest...

Another factor worth remembering is that changes in the rate of interest charged by building societies on existing mortgages may affect the sums involved.

When the interest rate is raised, existing borrowers normally have the right to extend the term of their mortgage rather than increase their monthly repayment.

If the term is extended, then the amount of capital outstanding at any time will be higher than under the original loan, and will not be fully covered by the decreasing term policy.

The shortfall is unlikely to amount to much, but it rather defeats the object of the original exercise to know that the assurance does not entirely extinguish the debt, and that the surviving partner may be responsible for paying up to several hundred pounds to the building society.

In this situation the cover may be raised (so long as the policyholder is still in good health) at nominal cost to match the new mortgage term, provided the insurer will agree to do so.

If the term of the loan remains unaltered, of course, an increase in the interest rate and monthly repayment will not significantly affect the amount of capital outstanding.

It is possible to avoid the problem by making the initial sum assured say 10% higher than the amount borrowed.

However, the inconvenience caused by the large interest rate changes in 2003 and 2006, which led many borrowers to extend their mortgage terms and thus necessitated adjustment of their decreasing term cover, has encouraged consideration of level term as an alternative way of covering the debt.

It is of course more expensive, but may well fit in better with a family's planning of life insurance needs.


An Online Guide To Life Insurance - More information ....

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Read On: read next:for Term Assurance Example 3 - Read On


Mr and Mrs Smith are buying a house on a £200,000 mortgage.
At the same time they are considering their overall insurance needs.
They have two young children and Mrs Smith is not working. They decide that they need £220,000 of term cover in addition to covering the mortgage loan.
By effecting all the cover as level term over 20 years (the same term as their mortgage, which is on an older house) they are in fact buying cover increasing from £220,000 to £230,000........ see: read next:for Term Assurance Example 3 - Read On


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