Cancelling insurance could be your biggest financial mistake

Each month, the news from the Bank of England is causing more stress for homeowners. It is continually increasing the base rate to tackle inflation. But while inflation is a slow reactive change, it’s creating short-term financial distress for anyone already struggling with the cost-of-living crisis.

Homeowners on tracker mortgages, their lenders’ Standard Variable Rate (SVR), or those who are shortly coming to the end of a fixed-term deal are starting to panic about the effect these base rate rises have on their monthly mortgage repayments.

The Institute for Fiscal Studies (IFS) (as reported by the BBC) has already warned that:

“1.4 million mortgage holders will see their disposable incomes fall by more than 20%”, with those “under 40 hit the hardest”.

The IFS has also stated that:

“60% of those with a mortgage – 8.5 million adults – are set to spend more than a fifth of their incomes on mortgage payments”

According to the BBC report:

“mortgage holders would pay on average almost £280 more each month compared to March 2022, if mortgage rates remained at around 6%. It said people aged between 30 and 39 would typically pay about £360 more.”

Clearly, this is a huge issue, and we appreciate any increased mortgage payments are playing havoc with everyone’s outgoings.

But we are seriously concerned about some of the measures homeowners are taking to cut their costs.

We’re already hearing people tell us they can’t afford to pay for life or income protection insurance because they don’t have the money for the premiums. We know it’s tempting to look at cancelling insurance plans, but that could put you at risk.

In our opinion, it’s frightening these types of insurance are increasingly being seen as luxuries rather than essentials.

Your life insurance or income protection plans are vital

As independent mortgage brokers, our role is to risk assess your finances.

During our initial affordability checks, we’ll make sure you can still afford your mortgage in worst-case scenarios.

We don’t ever want you to be in a position where you default on your mortgage or, even worse, have your home repossessed.

Your home should be your sanctuary.

A place of secure refuge.

That’s why we advocate for you to take out comprehensive life insurance policies when taking out a new mortgage or remortgaging to a new deal.

These policies protect you in case you become ill or cannot work. They are there to ensure your family has long-lasting financial stability, even if the very worst should unexpectedly happens.

With life insurance or income protection plans, you know you or your family will have plans to pay the mortgage payments in worst-case scenarios.

Don’t skimp on your home insurance

Your mortgage lender will require you to have substantial building insurance, often as a condition of the loan. Your building’s insurance is there to pay for any damages should your home be physically affected by something like a flood or fire, or even vandalism or a break-in.

Similarly, your contents insurance should be enough to cover every belonging you have. If your home caught on fire, and you needed to replace absolutely everything you own, your contents insurance should be enough.

We get it.

The lower the cover, the cheaper your insurance premiums. It can be tempting to go without if you haven’t got enough cash each month, but that could be the biggest financial risk you ever make. As one of our customers found out the hard way:

“In 1998, we went to bed as usual on a Friday night. By Saturday morning, the local river had burst its banks and the whole of our downstairs was under 3 foot of water. There was no warning and no chance of avoiding the damage caused. We lost everything we owned downstairs – right down to the floorboards. We were lucky, we had buildings and contents cover. Some of our neighbours didn’t and it was very tough for everyone involved. I will never be without insurance again.”

Why cancelling insurance could be a financial mistake

Of course, it goes without saying cutting your life, income protection, or home insurance is a huge risk. You’re gambling on your family’s finances, and this could be disastrous in the long run.

You might save a few pounds each month, but at what cost?

In the long term, you could be harming your own finances.

Let’s find out how.

Insurance premiums are based on risk

If you took out a life insurance premium when you were in your 20s, your costs would have been much cheaper than if you took out the same level of cover in your 40s or 50s.

If you plan to cancel your life insurance as a temporary measure, you might find the exact type of cover you had is no longer available. Perhaps your medical history has changed, or you’ve started smoking.

As a result, your premium costs could be significantly higher when taking out a new policy compared to your existing insurance plan. Those additional costs could outweigh any savings you make in the short term by cancelling your life insurance plan or income protection.

You could miss out on unknown benefits

Many life insurance providers give their clients a number of benefits and incentives which make the cover more affordable. For example, Vitality Life Insurance provides discounts and rewards for those signed up for their Vitality Rewards scheme. And many other insurers will give rapid access to remote GP appointments, physiotherapy, counselling support or even discounts on gym memberships.

Before cancelling any insurance plans, make sure you’ve checked what features you’re losing access to that could be worth their money.

Your savings should be for you

If you’ve got savings set aside, you might be tempted to cancel your income protection insurance because you have a safety net. But while having a rainy-day fund is good, how long will those savings last? After all, you never know how long you might be out of work.

In fact, your income protection plan will not just give you a salary payment while you recover an injury or physical or mental ill health. It can continue to pay out until you reach retirement age if you can never return to work and have been signed off indefinitely by your doctor.

A recent report from LV= Advisor highlighted that:

“45% of all UK workers would rely on their savings if they were unable to work due to illness or injury“.

What’s more,

“39% of workers hold less than £5,000 savings, which for many households would only pay the bills for a few months.”

This genuinely frightens us.

We want you to spend your savings on the holiday you’ve always dreamed of, or the new car you’ve got your eye on.

Having an insurance plan is your best bet for making sure you can use your savings for what you want to use them for.

Talk to us before cancelling insurance policies

Before you do anything, please talk to us.

Our mortgage brokers can look at your insurance plans or mortgage deal to see if we can find any suitable ways to reduce your outgoings without losing your financial protection entirely.

We’ll talk through the pros and cons and ensure you’re considering your long-term financial security and short-term savings.

We can even offer advice on making small changes that could help save a few more pennies, which will help you cope with any mortgage payment changes.

All you need to do is pick up the phone and call us.

Call us now on 01582 450000.

Alternatively, why not contact us and book a time that suits you?

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE