I had a really interesting discussion about life insurance yesterday with a lady I’ve respected for many years. I will not embarrass her by publishing her full name as she doesn’t know I’m writing this. Some people reading this (former clients of The Money Centre in particular) and the lady in question if she reads it, will know who I’m referring to though. I will call her Ms T. She was one of the best buy to let consultants we ever had working at The Money Centre and always finished in the top 10 fee earners every year. Ms T literally went from being our tea lady to becoming an Associate Partner in the business whist bringing up two lovely daughters as a single parent. She also managed to buy a few properties for investment too so I think you can begin to see why I have such respect and admiration for her achievements.
When The Money Centre pulled out of the buy to let mortgage market back in 2009 Ms T decided to become a financial advisor. She obviously still arranges lots of buy to let mortgages but what really surprised me was when she told me that landlords also ask her to arrange their life insurance. Most of the landlords I talk to aren’t interested which is why we never sold life insurance at The Money Centre. Ms T said that’s what she used to think too but her opinion now has completely changed and she explained why.
As you probably know, financial advisers are regulated and have to prove that they know their clients. The FSA has strict rules called K.Y.C (Know Your Client) so one of the questions that Ms T always asks landlords when she’s arranging a mortgage to help them buy a property investment is why they are doing it. As you might expect, the answer is more often than not to provide a nest egg for retirement. Others invest into property to provide a legacy for their children, to funding further education or with a view to helping their children out later in life, perhaps to get on the housing ladder. Ms T’s next question, especially where couples are concerned, is what would happen if one of you were to die. The stock answer is that the property would either be retained by the surviving partner or it would be sold. Would the surviving partner want to keep the property, maybe, maybe not. If it was sold though, what would replace the future growth on the investment? How would retirement or children’s futures be affected? It makes you think doesn’t it?
Another reason that landlords are buying more life insurance these days relates to the credit crunch. You may be forgiven for thinking that may deter people but again Ms T made some very good points. There is a very good chance that landlords who arranged buy to let mortgages in the five years prior to the credit crunch are now with a mortgage lender which is no longer in the market and has targets to get as much money back as possible. Examples include Mortgage Express, Capital Homeloans, Irish Permanent and several others. These landlords have got some fantastic deals in terms of mortgages and would be very reluctant to change them for the deals now available. Given that properties have fallen in value and lenders are now offering mortgages at lower LTV’s there’s also a very good chance that a substantial amount of money would have to be put into a deal to refinance. What if the mortgage lenders were to insist on the loans being repaid if one party to the mortgage was to die though? Could the survivors raise the extra cash or might they have to sell? What if the sale proceeds didn’t cover the repayment of the mortgage? These are more very compelling reasons for landlords to purchase life insurance according to Ms T.
I’ve always been a big believer in life insurance. In fact, I spend £800 a month on it, but that’s because I have a lot to protect and I have health issues which bump the premiums up. It doesn’t help that I’m a smoker too. I suspect Ms T would tell me these are all reasons why it’s even more important for me to have life insurance.
Ms T made another very good point regarding affordability. Pre-credit crunch the bank base rate was 5%, it’s now 0.5% and looks like it will stay that way for quite some time. With a 90% reduction in the bank base rate, most landlords biggest expense, the money has been created to buy life insurance protection whilst we are in such turbulent times.
I’d be really interested to read about your thoughts on this so please leave a comment below. However, do feel free to drop me a line if you would like to have a chat with a suitably qualified landlord expert about your own financial planning. My email address is firstname.lastname@example.org
Related articles in this series
You are here >>> Part one – Should buy to let landlords buy life insurance?
Part three – Barry’s story – it could have been you!
Part five – Financial Advice – how do you pick an adviser?
Update 16th May 2013