The next few years are going to witness an increasing amount of activity from first-time buyers settling into the housing and mortgage marketplace. In 2019 alone, Swiss Re, recorded 525,000 term assurance plans completing, so the next few years will witness even more.
First Time Buyers, by their nature, tend to be young couples because jointly, they can afford a bigger home and a larger mortgage. Naturally, there are plenty of single people buying, but with the acceleration of house prices across the UK recently, FTB's tend to club together.
Many will be young couples not yet married or in civil partnerships taking out a joint mortgage debt over a considerably long term.
The need for protection is obvious and doesn't need to be highlighted too strongly either. People see the need clearly enough. Death and critical illness are both needs being addressed through term assurance plans.
With a couple, the default advice tends to be joint. I often wonder why? Easier, cleaner, less admin. Cheaper maybe, simpler to understand and to explain. The knee jerk reaction joint life first death prevails.
For unmarried couples, there are a few problems that may steer you towards an alternative solution. Let me explain.
A joint life plan is inherently unportable and can't be split up if the couple goes their separate ways. Not that we should encourage this or even bring it up too strongly. Love is in the air tends to flavour most mortgage meetings for young couples. However, if they were to separate, often the joint-life plan gets cancelled. Single policies abound.
Would leave the surviving person uninsured. This may no be a real issue because their mortgage would have been repaid, and they can get on with living. The joint-life plan stops when a claim is made. Two single plans would leave one policy continuing.
Now we reach the complex reason, so here are the concerns behind this problem:
- It's the deceased's estate that is the problem and potential taxation, i.e. Inheritance Tax.
- You do have to be mindful that the sums may not be large enough to warrant an IHT concern, but FTB's in parts of the country are borrowing extremely large amounts, and the Government 95% Mortgage Guarantee Scheme does allow homes up to £600,000 to be included, well above IHT thresholds.
- On death, Probate requires that the assets of the deceased person be disclosed. If the property were owned Tenants in Common, then a share of their house would pass into their estate.
- Even if it were owned Joint Tenancy, a nominal share would still pass into their estate, even though that share was immediately transferred to the surviving person.
- In addition, the half of the life policy, which pays out, would also be included in the estate, again, even though this was paid out to the survivor because a joint life plan was taken.
- These two token figures could easily breach the IHT threshold and give rise to an IHT bill that the deceased's next of kin would have to pay. Not the surviving mortgagor, depending on whom is inheriting the estate. Bear in mind most young unmarried couples don't have wills, so the intestacy rules would send their money to their parents first.
- Could the family be annoyed enough to attempt to redress against you, the mortgage adviser? Possibly and with claims management company's circling like vultures for their next big claim prize, who knows.
Quite simply, make the default advice two single policies rather than joint. Two single plans are written in trust, naturally, would alleviate these problems. They wouldn't cost much more. This appears an oxymoron, and you need to test it using your quote apps. Usually just a couple of pounds a month.
Life of another is another possibility to single plans in trust, but these have pretty much died a death, pardon the pun, since the last century as they are inflexible.
Entering into the protection marketplace for a newly CeMAP qualified mortgage adviser might seem an easy step; after all, it's not complicated, and CeMAP covered the topic.
Wrong, how wrong.
Protection needs to be carefully considered, and if you want to take it seriously, then a more advanced qualification is essential for your and your client's peace of mind.