Don't feel obliged to take out your life assurance with the bank that gave you your mortgage, shop around
Hands up, how many reading this arranged their mortgage protection ie life assurance policy with the institution they took their mortgage out with as well?
I would suspect the % is high.
I mean it's easy to fill out a form with the bank and let them organise it when you’re filling out other forms with them. It’s one less thing to do and the premium seems reasonable, and out of a certain amount of loyalty (they gave you the mortgage after all) and obligation (some people think that whilst they don't have to arrange it through the bank, they think they should because the bank will look more favorably on them, and process their mortgage quicker - they won't by the way) you let them arrange it for you.
So, there are many reasons why you could take the easy option and arrange it this way.
And in many cases, there is nothing wrong doing this either. The type of policy and monthly premium might be just fine, but of course there is the flip side, when the policy set up is inappropriate and the resulting monthly premium is higher than it should be.
There are two reasons why you should be cautious when arranging your policy with the bank you get your mortgage from. The first is that they are likely to be a tied agent. And what this means is that they can only offer you products and premiums from one source only. You don't have any choice or any other options. The policy will be with the company they only transact life assurance policies with, end of.
And depending on who that company they are tied to is, the premium might be very good or very bad.
And banks get paid a commission from the life assurance company they arrange it through. Yes, it is a condition of a mortgage that you have to take one out when the mortgage is secured on a primary residence, but they have a second vested interest in arranging it for you. Not only will it allow them issue that mortgage for you, and be in receipt of thousands in interest payments from you over the term of the mortgage, they will also get paid when they arrange the life policy for you as well.
And they get paid very well by the way.
They can get paid as much as 110% of all your monthly premiums in the first year together with a trailer payment of 10% of your premium from years two to 10. And the amount they get paid isn't a secret, because anyone who has ever got a policy arranged will see when the policy documents issue, exactly how much the company who introduced it will get paid.
I wonder though how many people ever question, if this payment impacts the monthly premium?
Do you think the amount the bank gets paid, is not related to what your monthly premium is?
If you do, then think again, because it absolutely does, and don't be naive in thinking otherwise.
The amount a life assurance company adds to your premium in order to pay the introducer of the policy to them, can be as much as 25%.
Let me give you a real life example of this, and the impact it can have.
I came across a couple last week who were taking on a new mortgage and needed a life policy. They were 40 next birthday, in good health, and we're both non-smokers. The life assurance premium quoted by their bank was €168.85 per month.
The life assurance company the bank was tied to, didn't have the best premium in the marketplace, and rarely do, so when the couple approached me to check the premium and see if it was okay, and thankfully they did, because when I checked with all life assurance providers, the best premium available to them was considerably lower than what their bank was offering, it was €135.53.
The better premium was based on zero commission being paid, so the extra €33.32 per month they were paying was going towards paying their bank. And in the first year, the bank was going to receive about €2,229 in commission from the life assurance company.
The bank will receive a very small amount each year for the next nine years (€202.62 per year), but the couple continue paying that bigger premium for the next 25 years.
If they arranged the policy through their lender, they would end up paying a total of €50,655 in premiums.
Arranging the policy with a different provider, based on a zero commission basis, the total amount they would pay is €40,659.
That’s a difference of €9,996 over the lifetime of the policy, so they end up paying 25% more than they needed to.
You can see the difference is considerable between both options and if they used that €33.32 as an overpayment on their new mortgage for example, the term would reduce by eight months saving them c. €6,834 in interest payments in the process.
The impact is significant, so it matters, and it matters that you consider other providers rather than just what your mortgage lender has to offer.
And when you have that information to hand, you can go back to your bank and say thanks for your offer, and I am happy to proceed ahead with you if you can match the premium I have been quoted by this other company. And if they need evidence of this, happily give it to them.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie