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Term of endearment

It is no great surprise that the market for endowment mortgages has well and truly collapsed. Sixty-eight per cent of all new mortgages are now being taken out on a repayment basis, with 19 per cent being interest-only or supported by a Pep or pension policy. Only 13 per cent of new mortgages are supported by endowment policies and this number is expected to continue to decline.

Why are these statistics no great surprise? The removal of tax relief on endowments was the first nail in the coffin but the now well-publicised misselling scandal and product underperformance, which has left thousands of homeowners high and dry, has finished off endowments for good.

To put the boot in, many life companies will be sending out a second round of letters shortly in which they spell out to policyholders the bad news about the likely shortfall they will encounter when it comes to repaying their mortgages.

This is a dark period for both homeowners and financial advisers, which we all hope will not be repeated in the future. Unfortunately, however, there could be another mortgage-related problem about to erupt which, ironically, may be caused by underselling rather than overselling.

The issue concerns the homeowner&#39s ability to repay their mortgage if a key breadwinner in the family should die.

Here are a few sobering statistics which put the problem into sharp focus. British consumers are taking on record levels of debt at the moment. The average house costs £101,980 and the Halifax has recently confirmed that, over the past year, house prices have risen by 16.9 per cent.

So worried is the International Monetary Fund by this situation that it has recently announced that house prices and debt levels in Britain “warrant careful watching”.

The reason for this boom in consumer debt is easy to identify. Interest rates are at an all-time low and, despite talks of an economic downturn, consumer confidence remains high. In January, gross mortgage lending by banks and building societies was £13bn, up from £9.5bn during January 2001, thanks mainly to the strength of remortgaging.

Against this background of rising debt, consumers seem reluctant to protect themselves if the worst should happen. A recent Mintel survey revealed that 42 per cent of adults do not have (or do not know if they have) life insurance and this figure rises to an astonishing 83 per cent for those aged under 25 – the first-time buyer market.

The same report showed that 26 per cent of adults with children under 15 would be left financially vulnerable should they or their partner die.

Unfortunately, the Office for National Statistics regularly pumps out figures showing that one in four adults will suffer a critical illness before the age of 65 and one in three people are at risk of developing cancer. Around half of all deaths in the UK are caused by cancer or heart disease.

Ironically, 55 per cent of people admit that their standard of living would fall dramatically if they were unable to work for six months or more due to serious illness and 82 per cent agree that they need to make their own arrangements to ensure their standard of living is maintained if something threatens it.

So the picture is clear – lots of debt, acknowledgement that illness or the death of a breadwinner would cause serious problems and yet a large percentage of people remaining underinsured. What is going on?

Your initial response may be that consumers have never been terribly excited by life insurance and we have known for donkeys&#39 years that many people are underinsured. True enough but there is another problem lurking in the background that is exacerbating the problem.

As more and more borrowers take out mortgages and remortgage, so they are electing for repayment loans. But lenders are less stringent in ensuring that some form of life policy is in place. In most instances, lenders leave it to the brokers to ensure their client has adequate protection in place to repay their debt in the event of the death of a key breadwinner.

If budgets are tight, life insurance may be viewed as an expense that can be deferred until later. The consequences of this approach are all too obvious.

The good news, however, is that life cover has never been cheaper. According to research by Swiss Re, the average monthly cost of £100,000-worth of term insurance for a 30-year-old male non-smoker with a 25-year policy has fallen from £14.20 in January 1994 to £7.95 in April 2001.

But it is not just non-smokers for whom rates have almost halved – premiums for smokers are down by 40 per cent since 1994.

The price fall is due to better mortality and morbidity rates as fewer people are claiming on life policies between the ages of 40 and 60. Also, the Aids scare in the mid-1980s caused insurance rates to rise but the level of Aids-related deaths in the UK has not been close to the levels originally predicted.

Greater competition has also played its part in driving down the cost of life cover, with high-street retailers entering the market and marketing policies aggressively.

If your clients have not renewed their life cover for the past five or six years, you will almost certainly be able to help them make considerable savings and, if they have never had life cover, you should be able to give them a pleasant surprise when you quote for cover.

The final piece of good news is that, as a broker, provided that you have access to a good panel of insurers, you will also almost certainly be able to source cover at a cost that is cheaper than policies being marketed by the major high-street brands.


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