Get in touch for a free, no-obligation chat with an adviser about how we might be able to help.
Neil Halliday from Mortgage Advice Centre joins the Mortgage and Protection podcast to explain mortgage protection and the different types of cover.
Why is mortgage protection so important?
The first point to consider is, what would be the alternative? For example, we know we have to keep paying the mortgage but do we cut back on everything else? Do we try to move back in with parents? Do we ask family or friends to help out, or do we move to a cheaper property?
What you have to realise is that this is probably the most expensive purchase you will ever make, but the house is more than just a pile of expensive bricks. Why? Because we live where we live for a particular reason. It might be that it’s a nice area, or there are good commuting links. It could be close to well performing schools, or near family and friends to have a good social life.
If all of those things are important to you, it’s worth insuring for a relatively small, monthly payment so you can ensure your plans don’t have to change because of something happening that you can’t control.
At the end of the day, it’s too important to take that risk.
What would happen if someone didn’t take mortgage protection out and the unthinkable happened?
If you can’t keep up with your mortgage payments, you risk losing your home. It doesn’t matter if the reason you can’t pay is because your partner has died or that you are suffering with cancer. The mortgage still needs to be paid each month.
Mortgage lenders don’t insist on life cover because they don’t lend you the full value of the property. The deposit that you put down protects the lenders, so they know they can repossess the property before the mortgage becomes higher than the value of the house.
Now, your lender would try and help for a limited period of time, but if things don’t improve, then you would have to leave the property. What people don’t realise is that if the house is subsequently sold and doesn’t fully repay the mortgage, that debt doesn’t disappear.
It follows you around until you repay it. At the end of the day, it’s just too important to take the risk.
Why do we need life insurance?
This is the most common type of insurance, where you put a plan in place and if somebody dies, the mortgage is paid off. But is that enough? If the mortgage is gone, will there be other costs that could cause problems?
If you have children, you might need money towards a college or university course, a deposit for their first property or a contribution towards a wedding. Your surviving partner may not be able to afford these on one income.
That’s why some people choose to set life insurance at a level that puts some money in the bank as well as clearing the mortgage.
Do I need critical illness cover?
So we’ve explored what happens if somebody dies and the financial impact that it could have. But what happens if one of us develops a serious illness, such as a heart disease or cancer?
This is where critical illness cover comes in. It pays a tax free lump sum if you suffer from a specified illness. We would compare the various policies to see which plan would be suitable for each client.
The financial implication of someone with a critical illness can be severe – they may need to be looked after and it could also mean you need to make alterations to the home. The lump sum from your policy can help you pay for those changes and take the pressure off if you’re unable to work.
What is income protection?
Income protection is a plan that can help support you with a monthly payment if you’re ill or injured and can’t work. So unlike critical illness cover where there’s a specified list of conditions, with income protection you receive payment if you are ill or injured. It helps cover some of your outgoings, tax free.
That means that you’re able to focus on getting better and back to work. The payments continue until you are back to work or the policy ends. This is a really useful plan to have, especially if someone is off work for a long period with stress, anxiety or depression as well as physical conditions.
It’s important to look at this, because many people overestimate how much help you would get from the state. Think about how you would maintain your standard of living if you had to rely on state support at under £100 a week.
What is family income benefit?
This is a different form of life cover plan. Instead of paying out a lump sum of money, it pays out a monthly income for the rest of the policy term. The amount your family receives could stay the same or you could choose for it to increase to account for prices rising over time.
People often use this cover to make sure that their children are looked after up till the age of 21 when they become more financially independent.
Can you combine different protection policies?
You can combine policies, and many providers will often give you a multi-policy discount. By combining plans you can cover more than one person. Say, for example, if you’ve got the mortgage in joint names, you only need one plan which covers both people for both life and critical illness.
What you can also do is take into account the benefits you already have. So, for example, we can also allow for support you might get from work. If, for example, you have six months’ full sick pay from work, your income protection plan doesn’t need to kick in until after that, which will make the monthly premium cheaper.
What about planning for inheritance tax?
If you do have to pay a tax bill you’re lucky, because it means you’ve got quite a large estate. Inheritance tax applies when your estate is worth more than £325,000. It is paid by the people who are dealing with your estate. There are different methods to mitigate that tax, but one option is to take a whole of life plan.
As the name suggests, there’s no end to this plan. The other products we’ve been talking about each have an end date, but whole of life insurance pays a lump sum when you die at any age. You can choose the amount of cover to match the expected inheritance tax bill.
Then, when you die, this money is used to pay the tax bill, which allows those dealing with the estate to pass all your assets to your beneficiaries.
How much should I budget for protection?
There’s no set amount that suits everyone. The best approach is to put the cost to one side initially and have a full review to see what your protection needs are and put them in order of importance.
Then we would look at your monthly budget to see what’s affordable and how those needs could be covered. Ideally, we would cover all of those needs, but the cost needs to be comfortable.
Consider what’s important in setting that budget, however. Some people might be paying £50 a month for their mobile phone. Think about how much you pay for your car insurance. Isn’t your life and health worth more than your phone or car?
For an initial, free of charge chat about mortgage protection, just get in touch.