Critical illness insurance and my mortgage ?
Building society interest rates can change rapidly and substantially. In two recent years (1973 and 1976) mortgage rates were hoisted respectively by over one-third and over one-fifth. Those who had stretched themselves financially to meet mortgage commitments found themselves in trouble. Whereas the repayment mortgage has some flexibility in this situation, the endowment mortgage has none. When the interest rate is raised, repayment borrowers usually have the option of extending the term of the mortgage rather than increasing their monthly payment (extending the term, say, from 25 to 30 years reduces the capital element in each repayment). But this option is not available to endowment borrowers. It makes no difference what the term of the loan is because they are paying only interest, and they cannot stop paying their critical illness insurance policy premiums as there would then be no cover for the loan.
Endowment borrowers who find themselves squeezed have only one, unpalatable, course of action, to convert their loan into a repayment mortgage of the same or slightly longer term, which will reduce the monthly payment. Surrender of the critical illness insurance policy will, as we have seen, produce a derisory return. It is worth remembering, therefore, that it is unwise to be fully committed on long-term loans to the maximum you can possibly afford.
Whether the full or low-cost endowment method is used, it is worth thinking about making the policy a joint one. This means that the sum assured is payable upon illness of either husband or wife. The additional premium required is normally less than the cost of a separate term assurance for the wife for the same sum assured.
Almost all insurance companies now have low-cost critical illness insurance schemes on the market. The main competitive thrust to date has involved the reduction in premium rates to make the schemes more competitive as compared with the repayment mortgage. Some plans even involve a reduced premium on the critical illness policy for the first few years and a higher one later, with a deferment (or reduction) in the investment benefits.
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