Under-insurance is causing a ‘protection gap’ for UK families planning to use life insurance payouts to pay down their mortgage.
The ‘protection gap’ refers to life insurance payouts that fail to match the costs the policyholder was intending the cover to meet.
Figures from the Association of British Insurers (ABI), the Bank of England (BoE) and the British Bankers’ Association (BBA) show that the gap between average mortgage costs and average life insurance payouts is growing.
BoE figures show that the average outstanding mortgage costs £83,000 while ABI stats reveal the average life insurance payout is £51,500. This is a shortfall of £31,500 and would only cover 62% of the costs of the average mortgage.
The gap between life insurance cover and new mortgages is even greater. BBA figures show that the average new mortgage is £167,000. A payout of £51,500 would only cover 31% of the costs of a new mortgage and is a shortfall of £115,500.
Insurance provider SunLife conducted a survey of their customers and found that 29% buy life insurance cover when they take out a mortgage.
Dean Lamble, managing director at SunLife, said:
“People are treating life insurance like a type of mortgage protection. Of course, if for example the breadwinner in a family was to die, being able to pay off the mortgage would be a big help. But, while that would take a significant burden off the family, it wouldn’t leave any money to pay the ongoing household bills, provide an income or mean the everyday things could carry on.”