Lee Gathercole and Neezam Romjon talk all about mortgage protection.
Why is mortgage protection so important?
Mortgage Protection is insurance for your mortgage in particular. Usually you get insurance to cover something that you cannot afford to lose, and the vast majority of people cannot afford to lose their home. The importance of mortgage protection is ultimately to make sure that you can keep your home, and continue with your mortgage payments when you are unable to due to Ill health or death.
If you do take out a mortgage and you do not have mortgage protection cover in place, it’s important to consider how you would continue to pay the mortgage if you were off work due to Ill health, or your partner passed away. It’s a morbid conversation to have but it’s a really important one.
What about mortgages that have been completed without protection?
There are people who’ve got mortgages without any protection. This is usually due to a lack of understanding. I think there’s an aversion to taking out add-ons when you buy a high value item such as a sofa, car or even a mortgage. This is the kind of extreme end of protection, however, mortgage protection is protecting your life and most importantly, your family.
In terms of what happens to someone that’s got a mortgage without protection, when a couple buys a property jointly and between them they can afford the mortgage and bills, if one of those applicants died, everything would fall onto the shoulders of the remaining person. So there’s real significant consequences to being unprotected with such a large debt, it really is life changing.
Why do we need life insurance?
The importance of it is quite straightforward, if you insure anything you cannot afford to lose, someone’s income may well be one of those things for some people. It’s hard enough losing that person, but when you have to take on the additional debt, as well as potentially looking after children, it’s a whole different world.
Do I need critical illness cover?
If you’re diagnosed with a critical condition which is covered by a critical illness policy, and every insurer has different definitions of that, you receive a lump sum payment. This can be used for whatever you need, sometimes it can be used to clear the mortgage debt.
The latest statistics say that one in two of us will be diagnosed with cancer, but the good news is that nowadays more than 50% will survive. Critical illness cover isn’t there to cover terminal illnesses as such, It’s to cover you for critical illnesses.
Most of us will know someone that has suffered from a critical illness that can change your life. You may be off work for months or even years to recover, and having the financial support of a lump sum paid to you on diagnosis takes away a huge amount of stress. It could keep mortgage payments going so you won’t need to worry about losing your home and it takes that stress off the whole family.
You can tailor the policy to cover yourself for a certain amount of cover, and we’ll give you advice on what the right amount is for your circumstances, and which policies are suitable.
What is income protection?
Income protection is very similar to critical illness and life cover, but rather than paying a lump sum, income protection is more of a long term insurance policy that can cover you up to retirement age or for the term of the mortgage. It’s there to cover any loss of earnings due to ill health, and it pays you on a monthly basis, typically as a percentage of your usual monthly income. It could support you on a month-to-month basis when you’re not able to work.
We tend to find that employers would cover a few months of sick pay, but generally what with more serious illnesses two or three months is not long enough. Having an income protection policy in place until you retire can make sure that you keep your home and you can continue to pay the bills and look after the family. These policies usually run alongside critical illness policies to ensure you’re fully covered. It doesn’t cover redundancy, however, there are other policies that do.
What is family and income benefit?
Family and income benefit is a type of life cover, so it pays out if the insured person dies. The way in which it differs from standard life insurance, is that instead of paying you one lump sum, it’s designed to protect people who have got financial dependents.
If the insured person was the breadwinner, their income has obviously stopped, but there’s still a need to cover the cost of raising a child or children. Family income benefit usually pays the surviving partner an annual amount in line with the cost of raising a child, until they are eighteen, or perhaps twenty one if they’re in full-time education. An adviser will tailor a policy to suit your needs and budget.
Can you combine different policies?
Absolutely, typical policies could be life and critical illness cover, but you can also cover for serious illness which tends to be the more common one. All the policies complement each other really well in terms of what they cover for.
How you determine which policies are right for you is really down to your priorities and there’s lots of different policies that can help you cover them all. You could actually have all four of the policies we’ve mentioned above, to be covered for all different events.
What about planning for inheritance tax?
Inheritance tax planning is really important and usually forms part of a financial review. It’s not an area we can currently advise on. Life insurance cover plays a huge part in inheritance tax planning, so seek advice from a financial adviser to go through your options.
How much should I budget for mortgage protection?
There isn’t one specific budget for everyone, but something that we do on our initial discovery call is to gain an understanding of your monthly budget and we build both your mortgage and insurance costs within that budget.
The term mortgage protection is probably not an accurate reflection of what it is. It’s not really about protecting your mortgage, it’s about protecting you and your family from your mortgage. If you don’t have income protection in place to guarantee you an income, you may be reliant on the state, and statutory sick pay is only £92 a week, which really highlights the need for income protection if you can’t work due to an accident or an illness.
You can protect every single scenario if your budget is unlimited, but what it always comes down to is how much you are willing to pay, and we’ll tailor our advice and get it into your budget as best we can for the mortgage and protection. It’s about weighing up the cost and the risk, so speaking with a mortgage protection adviser like us, we’ll be able to tailor our advice to your budget and your needs.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS