Average life insurance payout wouldn't clear the mortgage
The average UK life insurance payout wouldn't be enough to cover the average outstanding mortgage, claims data has revealed.
The average shortfall is £31,500, based on an average outstanding mortgage of £83,000 and average life policy payout of £51,500, according to insurer Sun Life.
That means the life insurance policy would only cover two-thirds of the mortgage.
However, Sun Life also revealed that among clients taking out new mortgages, the difference is greater still - with the average payout accounting for just a third of the average new mortgage of £167,000.
Despite the UK average life cover payout of £51,500, the insurer said that for its Family Life Insurance term product, the average cover that new customers are taking out is £116,692. While that's 40% more than the typical outstanding mortgage, its managing director Dean Lamble says it still gives cause for concern.
"That is itself is very revealing - 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."
The insurer is highlighting what it calls the 'protection gap' to encourage people to make sure they are not underinsured should the worst happen.
Almost a third (29%) of people take out life insurance when they take out a mortgage, while nearly a quarter (23%) take out cover after the birth of a child, according to Sun Life.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).