Bank of England Base Rate and Life Insurance: What You Need to Know

It seems that every six weeks, there is trepidation as the Bank of England’s Monetary Policy Committee meets to discuss the current base rate. Although there are signs that the base rate may be stabilising after almost two years of rate rises, the UK is not yet out of the woods when it comes to inflation or a potential recession.

You might think that it is strange that we’re talking about the impact of the BoE base rate, considering we offer life insurance and income protection plans.

After all, those insurances are typically far more secure and as brokers, we are far less likely to be affected by rate rises in the same way that our mortgage broker peers are.

But when it comes to personal finance, the Bank of England’s base rate holds a significant sway over various financial products and services. Any movement in the base rate can substantially influence your decision-making because it literally impacts how much disposable income you have each month.

 

The Bank of England base rate and its influence

To understand why we are closely monitoring the BoE base rate, let’s start at the beginning and explain what it is and why the news has been so fixated on it.

The Bank of England base rate acts as a foundational benchmark for interest rates across the UK financial system. It directly impacts borrowing costs, savings rates, and investment returns. Fluctuations in the base rate can have a ripple effect on a wide array of financial products, including mortgages, loans, savings accounts, and, yes, life insurance policies.

A quick recap of why the BoE base rate has been changing

After the 2008 economic crash, the base rate was cut to almost 0%, where it remained until December 2021. The stability of the base rate meant that borrowing was cheap – although you had to have a significant deposit to buy a house, rates meant that mortgages were affordable, food prices were reasonable, energy bills were low and generally, people had disposable income.

However, the last few years have been tumultuous.

We’ve had the coronavirus pandemic to deal with, the exit from the European Union, the Ukraine War, and now the situation in the Middle East.

All of which have combined to create a perfect storm.

As a result, the UK inflation level spiralled. Suddenly, our monthly incomes no longer seemed to stretch as far as they once did.

To try and slow this inflation, the Bank of England has continually increased the base interest rate, where it currently stands at 5.25% (as of November 2023).

“Higher interest rates increase the return on savings. They also make the cost of borrowing more expensive.

Higher interest rates help to slow down price rises (inflation). That’s because they reduce how much is spent across the UK.

Experience tells us that when overall spending is lower, prices stop rising so quickly, and inflation slows down.”

Source: Bank of England

The link between the BoE base rate and life insurance

When the base rate rises, borrowing costs tend to increase, potentially making financial products like mortgages more expensive.

We’ve heard horror stories of homeowners who were tied into low-interest mortgages suddenly having to pay back hundreds of pounds extra each month because of the changing interest rates.

For example, you may owe £215,000 on your mortgage, with 25 years left on your term.

Previously, it was common to find interest rates sub 2%. Your mortgage would probably have been around £900 a month. But, if you’d come to the end of a fixed term deal and suddenly had to pay interest rates of 6%, that mortgage repayment would rise from £900 a month to almost £1400 per month – a £500 a month increase.

And as we all know, we’ve been hammered by rising energy prices, higher fuel bills and more expensive food prices.

When you add it all together, it’s no surprise that many people have said that they cannot afford their life insurance plans anymore. They may be reluctant to take one out at all, or they may be likely to cancel a life insurance plan in a short-term bid to save money.

But ironically, cancelling your life insurance could be a costly financial decision.

Why you shouldn’t cancel life insurance to save money

Obviously, we’re going to say that life insurance is an essential expense.

That’s because we’ve seen the consequences of what happens to families when a loved one passes away unexpectedly. Particularly right now, with living costs so high – could you afford to pay your outgoings on only one salary?

It genuinely worries us when we hear people say that they can’t afford a life insurance plan.

Without having a contingency to fall back on, you could be risking your family’s financial security, be forced to move out of your home, or struggle to pay the bills.

Life insurance is surprisingly straightforward.

Many people think that life insurance is complicated. But it’s really not.

You pay a premium each month/year for an agreed time frame. Then, if you pass away during that period, your loved ones receive a tax-free payout.

Unlike other insurance plans that need to be renewed annually, your life insurance premiums will typically stay the same throughout your policy term.

• If you took out a 45-year term policy when you were 28, you would still be saying the exact monthly/annual premium when you turn 68.
• Or if you decide to take out a whole-life policy (which runs until you die), your premiums will always remain the same.

The younger you are when you take out a plan, the lower the costs.

That’s because life insurance premiums are calculated on the basis of risk. If you are younger, statistically speaking, you are less likely to die or have developed any health conditions that could increase the likelihood of an insurance provider needing to make a payout.

You might be tempted to temporarily cancel your life policy to save money, with the intention of taking out a new plan in the future when the cost-of-living crisis eases. But there’s no guarantee that you would be eligible for the same insurance cover at the same price when you come to take out a new plan.

You could find that you’re paying a lot more for your insurance, making it a significant financial misstep.

Rather than cancel your life plan, why not ask us to review your policy?

It seems to be a little-known secret that life insurance plans are surprisingly flexible.

If you’re worried about the Bank of England base rate rises and the impact on your family finances, please talk to us before deciding to cancel your insurance. Our experienced life insurance brokers can review your life insurance and see if there are any ways that we can reduce your costs or find new value-added services that justify the expense.

We can offer annual life insurance reviews to periodically check that you have the right plan for your current needs. With our help, we can

• Check your premium prices. Changes to your health or lifestyle may impact your premiums. For example, if you’ve recently quit smoking, you could make significant savings by changing to a non-smoker life plan.
• Adjust the level of cover. Have you recently started a new job that offers death-in-service benefits? Maybe you’ve paid off the mortgage, and you no longer need the same level of cover in place. We can check your policy to make sure you’re not over or under-insuring yourself.
• Switch to a different type of policy. Term-life policies are often cheaper than whole-life plans. Rather than cancelling your protection outright, why not see if we can switch to a different type of policy to minimise your insurance costs?
• Make sure it will pay out how you want it to. As your life changes, so do your insurance needs. Perhaps you’ve started a family, or the kids have grown up. Maybe you’ve got divorced, or you’ve now welcomed stepkids into your family. Periodically reviewing your life plan will allow you to update how your plan pays out.
• Benefit from value-added services. Many insurers have now added extras to their policies. It’s now expected to have access to virtual GPs, counselling services or even have access to restaurant deals and family days out. Switching to an insurer that offers these value-added services can make you feel that your insurance plan provides greater value for money.

If you have questions about how the Bank of England base rate affects life insurance  – we are here to help

There’s no denying that the Bank of England base rate is having a massive impact on our daily lives – most notably our personal finances. If the base rate continues to rise and inflation doesn’t stabilise, then it will have a significant impact on the affordability and attractiveness of life insurance policies.

As brokers, we are staying informed about these changes, and we are consistently reviewing life insurance policies for our clients.

We don’t want you to pay over the odds for something that we view as essential.

Our approach to life insurance is to make sure that you’ve always got the right policy for each stage of your life. We know that your needs will change throughout your life, and we’re here to help adjust and update your insurance as and when you need it.

What’s more, with our price promise, you have our guarantee that we will ALWAYS beat any like-for-like quote, so you’ll never pay more than you need to with a life insurance, critical illness or income protection plan.

With our help and support, you can be sure that your life insurance remains a valuable and affordable asset for your future security – whatever the Bank of England base rate.