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Life insurance is typically taken out to
offer valuable financial protection for your
family in the event of your death, upon which a
payment is made to your financial beneficiaries,
heirs or family members. The extent of this
payment will depend on your insured sum and
earnings. Life insurance and life assurance may
be interlinked in advertisements, though bear in
mind the two policies are different. Life
assurance is a form of financial protection
which is also an investment, as you should
always get a pay-out at the end of the term of
the policy. Life insurance on the other hand is
simply financial protection for your family,
avoiding the issue of debt in the event of your
death.
According to an article by the Fair
Investment Company, the British life insurance
industry shrank to almost half the size of the
pensions industry last year and according to the
Association of British Insurers, less than 50%
of UK households hold a life insurance
policy.
In their most recent newsletter about this
issue, the Association of British Insurers found
that 25% of mortgage holders had insufficient
life insurance to cover their debt. The
ratio of new life insurance policies to new
mortgage loans was apparently 68% in 1994, but
by 2004 this had dropped by half to 33%.
The absence of mortgage life coverage poses a
serious risk for the dependants of homeowners.
If banks were to embark on wide scale
repossessions as a result of this absence of
life insurance, this would impose a risk on
their loan books and reputations. The
Association of British Insurers also state that
one of the main reasons behind the increased gap
between mortgage loans and insurance is the
emergence of people remortgaging their property
to take advantage of equity release through a
rise in value, without insuring their borrowing.
In their report it was stated that around 63% of
new mortgage loans were remortgages or further
advances, compared to 34% in 1994. Egg reported
at around the same time, that three out of four
of these new loan homeowners had no intention of
insuring this additional debt. This is
particularly worrying if couples are
remortgaging their property later in life
ñ towards retirement, given that should
anything happen to the breadwinner, the partner
would be left with significant debts without the
capability of paying the loan back.
Reasons for the downward trend in life
insurance take-up include:
* Relaxation in lending policy ñ
increased competition in the mortgage market
means that lenders are not forcing life
insurance policies on their customers
* High house prices have stretched
homebuyers, in particular first time
home-buyers, in terms of their mortgage
repayments, that the additional costs of a life
insurance policy are deemed too expensive
* There are more households with no
dependents
If you're interested in researching a life
insurance policy, make sure you shop around. UK
websites such as moneynet ( life
insurance ) provide life insurance and life
assurance information guides, as well as
providing price comparison research for the
different products. In the states, the website
LowerMyBills.com also offers a similar
service.
Because of the various factors listed above,
people have also become less familiar with the
term life insurance and without the awareness
there is little recognition of the importance of
this type of insurance. However as speculation
increases that UK households are not coping with
their debt, so should the awareness of life
insurance as an essential product in the
personal finance portfolio.
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About Rachel:
Rachel writes for the personal finance blog
Cashzilla:
http://www.cashzilla.co.uk
Rachel is a disillusioned, disaffected and
broke graduate, exploiting new media for
financial therapy.
E-mail: rachel@positiveinterest.com
Phone: 0131 561 2251
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