The Mortgage Protection Shortfall on a Top-Up
Aoibheann and Ciarán bought a house three years ago with a €320,000 mortgage over 30 years and a decreasing term mortgage protection policy of €320,000. They have now applied for a top-up of €80,000 to fund an extension, bringing the total loan to €400,000 over a remaining 27 years. The lender has approved the top-up subject to mortgage protection. Ciarán has a history of controlled hypertension and is on medication; Aoibheann is a non-smoker in good health. The existing policy was written on a joint-life first-death basis. The broker is asked to 'just extend the existing policy to €400,000' to save time.
1. Explain why simply increasing the existing policy may not be appropriate and what the broker should do.
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The existing policy is a decreasing term contract matched to the original €320,000 over 30 years. Its sum assured falls over time in line with the original repayment schedule. A top-up of €80,000 over 27 years has a different amortisation profile, and the original policy is already three years into its decrease. Simply raising the sum assured would not correctly match the new total debt at every point - there could be a shortfall in early years or over-insurance later.
Correct approach:
- Treat the top-up as a new, separate decreasing term policy of €80,000 over 27 years, matched to the top-up loan, leaving the original policy intact.
- Alternatively, replace both with a single policy correctly structured to the €400,000 over 27 years - but only after comparing cost and underwriting.
- Confirm the basis (joint-life first-death) remains appropriate and that the lender will accept two policies.
Underwriting: Ciarán's hypertension means the new policy will be individually underwritten. The broker must not assume the existing terms carry over - a material change in health since the original policy may lead to a loading or exclusion on the new cover.
2. Ciarán's hypertension leads the insurer to offer the new €80,000 policy at a 50% loading. The lender requires full mortgage protection. Advise the couple on their options.
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Options to present:
- Accept the loaded policy. The €80,000 cover is affordable and satisfies the lender. The loading reflects genuine risk; the couple should understand it applies only to the new policy, not the original.
- Shop the market. Different insurers underwrite hypertension differently; a broker should obtain quotes from several insurers. A 50% loading is high for controlled hypertension and may be improved elsewhere.
- Reduce the sum assured or term to lower the premium - but the cover must still satisfy the lender's requirement, which is generally the full loan amount.
- Lender's waiver or alternative. Some lenders permit a waiver of mortgage protection where the borrowers' circumstances justify it, or accept a different form of security. The broker should check the lender's policy; a waiver is not guaranteed.
Key advice: the couple should not be pressured into the loaded policy on the day. The broker should explain that the loading is specific to the new cover, obtain competing quotes, and document the recommendation. If they decline cover entirely, they risk the lender withholding the top-up and leaving the family without protection on the additional €80,000.