So why the trip down memory lane ? Last year , as we were getting ready for Consumer Duty , I was frequently asked if the new regulation would make protection more of a focal point within financial advice , and should the industry not just go back to the 1980s when it was a requirement to have life cover in force with a mortgage .
There is not a straightforward answer . Life cover was never a legal requirement when taking out a mortgage . But back in the 1980s , lenders , particularly banks , mandated that life insurance was sold alongside mortgage lending , but not necessarily for the reasons life insurance is advised on today .
What was the housing market like in the 80s ? The 1980s saw a mortgage ‘ revolution ’ as the Housing Act 1980 introduced the Right to Buy scheme , letting people in council houses become homeowners . Over 970,000 sales took place in the 1980s thanks to the scheme , with more than 2.2 million to date .
As a result , banks became a major distributor of mortgage products . Previously , building societies ruled supreme , with the Bank of England even describing the pre-1980 mortgage market as a cartel , with 80 % of mortgage lending being carried out by building societies , as well as having almost complete control over interest rates during that time .
Average property prices sat just under £ 28,000 or around three times average earnings . Today it is closer to eight times .
IT WAS DURING THIS TIME WE SAW THE RISE OF INTEREST- ONLY MORTGAGES , PEAKING IN 1989 WITH MORE THAN 80 % OF NEW HOUSE PURCHASES THROUGH INTEREST-ONLY LENDING .
The role of insurance alongside mortgage advice was not necessarily as clear cut as it is today .
The Consumer Duty has helped demonstrate why protection advice must be part of the holistic advice planning process , and this is a positive change .
Lenders typically mandated mortgage insurance as a way of protecting themselves , rather than the consumer , with 83 % of new home sales in the 1980s having an ( now often maligned ) endowment policy linked to the mortgage term .
With interest-only lending rising , endowment policies were a cost-effective solution letting the homeowner repay the outstanding mortgage balance at the end of the policy term .
They often included an element of life cover , meaning if you died during the term of the policy a nominated beneficiary could receive a cash payment .
What was insurance like in the 80s ? Critical illness cover ( CIC ), or ‘ dread disease insurance ’ as it was more commonly known , had only just hit the UK market and would not take off for another decade .
The income protection product we know today was better known as ‘ permanent health insurance ’, and like CIC it would be some years before we saw an increase in volume of IP cover sold today .
Life assurance , on the other hand , had been around for centuries . Until the mid-1800s , it was typically out of reach for most working and middle classes of society . This changed thanks to the Victorian innovation of ‘ industrial life assurance ’, with its small premium and low sum assured cover .
Suddenly , life assurance became an affordable way of avoiding a pauper ’ s grave . According to Swiss Re , by 1914 there were around 39 million industrial assurance policies in force .
Life assurance in the latter half of the 20th century generally consisted of with-profits and unit-linked policies , which were designed to provide customers with both a savings vehicle and life cover .
Insurance policies issued before March 1984 also benefited from life assurance premium relief ( LAPR ), which was essentially an incentive to encourage people to take out financial protection for their families .
The LAPR was available for policyholders at a very generous rate of 12.5 % – unthinkable when you look at the reliefs available today .
Are things different now ? Today , there are some lenders that will insist that life insurance is in force before the mortgage offer is made . But generally speaking , you can take out a mortgage without life insurance .
After all , if you are unable to pay your mortgage due to ill health or death , the lender still has an asset , and they can take that asset back .
Buildings insurance to some extent is still a mandatory requirement of a mortgage offer . In that situation , if the property burns down , the lender has lost part of their asset .
However , the industry has come a long way in the past 40 years . The role of protection advice is clearer , as are the products and the role they play in helping a client ’ s financial resilience .
The Consumer Duty has helped demonstrate why protection advice must be part of the holistic advice planning process , and this is a positive change .
However , there is still a big challenge with the extent of the protection gap in the UK . A recent Royal London report highlighted just how wide the gap is , particularly for nonhomeowners .
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