New research finds that thousands of mortgage borrowers fail to protect their loans with mortgage protection life insurance.
This discrepancy was calculated by the large difference in the number of mortgage related life plans sold last year relative to the number of new home loans made.
Comparing statistics from the Association of British Insurers (ABI) and the Council of Mortgage Lenders (CML), the independent financial product rating agency, Defaqto found that just over 31 per cent of all home loans made in 2009 were not protected by life insurance (also known as life assurance).
In 2009 the Association of British Insurers (ABI) report that there were 636,973 new mortgage life insurance plans taken out. Also for the year 2009, the Council of Mortgage Lenders (CML) reported that there were 925,000 new home loan advances.
Thus, the difference between new home loan advances made in 2009 and mortgage related life sales equated to as many as 288,027. In other words, over 31 per cent of all new home loan advances made last year were unprotected by life cover.
Naturally there may be many reasons for the lack of protection being taken out. Individual circumstances are likely to play an important role in explaining these figures, such as a lack of affordability. Many loans may have also been made to single individuals with no family to protect, therefore negating the need for life protection.
However, given the scale of the protection gap it is also very likely there are thousands of individuals out there with unprotected loans which could result in serious financial hardship for loved ones should the worst happen.
Couples should seriously consider taking out joint life insurance to protect their loan as the death of one partner could have grave financial consequences for the remaining partner, especially if children are involved.
The Defaqto researchers also suggest there is a significant lack of individuals taking out income protection plans to protect their ability to make loan repayments. One such product is mortgage payment protection insurance (MPPI), which covers home loan repayments should the policyholder suffer sickness, injury or face forced unemployment through redundancy.