Should you become seriously ill and unable to work, you’ll want to know that your finances can continue to support you and your family.
Steve from Momentum Mortgages joins the Mortgage & Protection Podcast to discuss mortgage protection.
When you take out a mortgage, you take on a big commitment. So you need to think about how you will repay that debt if something goes wrong. If you were to fall seriously ill and be unable to work, could you pay the mortgage and the bills? If one of you died, would you want to be left with your home at least, or would you want to be possibly forced to sell it?
It goes further than mortgage protection, too. When the worst happens, having a financial fallback can help you recover. For example, if someone is suffering from cancer, their partner might not want to have to work – they want to be able to be with their partner, and they might need to change their working pattern for hospital visits or to look after the children.
It’s not something that people often talk about – it’s not a nice subject to discuss and obviously it’s not something we want to happen. But if someone didn’t have protection in place, then possible outcomes are that they lose their home, be forced to sell it – and not be able to buy another property – and ultimately suffer detrimental impacts to their lifestyle.
They might not be able to afford the things they are used to anymore.
So life insurance, critical illness cover and income protection are really important. And yet people are more likely to get insurance for their mobile phones than their lives and their income.
Generally it comes down to someone feeling that they don’t need it or they can’t afford it. Our job as advisors is to make sure that a client has the most suitable cover in place – sometimes they’ve already got protection. In that scenario, we wouldn’t change anything.
Cost can be the big question here, and we’ll go on to talk about budget a little bit later on.
Let’s say that you’re a couple, you’ve got a mortgage together and you’re both working. If something happened to one of you, the likely outcome is that the lender will possibly force sale of the property, because they gave you that mortgage on the basis of two incomes.
Now there’s only one of you rather than two, the lender will feel that you can’t afford the mortgage anymore, and ask you to sell the home. And the only way to ensure you can stay in the home is to pay off the mortgage. A life insurance policy would pay the mortgage and secure your home.
When it comes to life insurance, providers can be relatively strict around pre-existing medical conditions. But that doesn’t necessarily mean it’s a barrier for you to get cover. An insurer will ask you for details of the pre-existing medical condition, whether you take medication or have treatment for it. You may be asked about dosage and time since diagnosis, and sometimes you will need a doctor’s report.
A pre-existing medical condition can mean that the life policy is what we call ‘rated’ – where the provider increases the premium to account for the increased risk. You may hear that pre-existing medical conditions include diabetes, cancer, heart conditions, stroke – but don’t assume you won’t be able to get cover, because often you can.
Critical illness cover is similar to life cover. It pays out a lump sum of money when you claim. Critical illness cover pays out the ‘sum assured’, on the diagnosis of a specified serious illness, as stated in the policy conditions.
Critical illness cover protects you in a much broader range of scenarios than life cover.
People ask whether they need it – and again it’s important to think about what would happen if you were seriously ill and couldn’t work for a considerable period of time. How would that affect your family and your lifestyle? Having financial backup means you don’t have to worry about money at a very stressful time.
We usually advise people to have multiple policies because each product does a different job. For example, you could have a life and critical illness policy that covers both of you, which we call a joint policy. That would pay out in the event of someone dying or being diagnosed with a critical illness.
But you can also have multiple different policies – and this is very common as many people don’t take out critical illness cover for the same amount of money as their mortgage. Critical illness cover costs significantly more than life cover because you’re insuring against around 70 different illnesses, as opposed to just one event, which is death.
Income protection is different from life and critical illness cover because it pays out a monthly benefit, not a lump sum of money. It’s there to pay you an income if you can’t work due to illness or injury.
Let’s say that a builder, for example, develops an issue with their back and is signed off work for six months. They are now relying on sick pay, which is about £109.40 a week. They’re left without enough money to pay the mortgage and support their lifestyle. Income protection can then kick in and pay that person a monthly benefit until either they go back to work, they retire or they die.
There is normally a waiting period, called a deferred period of between four weeks and a year. We will determine the best deferred period is for each client. Generally, the shorter the deferred period, the more expensive the policy is.
Family income benefit is a type of life cover, but again it pays out a monthly amount rather than a lump sum. If someone dies, the family receives monthly payments until the end of the policy. It’s typically designed for a family where one person is the main breadwinner. If they weren’t around any more, paying off the mortgage may not be enough – there are still all the other bills to pay.
Let’s say, for example, someone took out family income benefit for a 25 year term, and 10 years down the line, that person died. The policy would pay the monthly benefit for the remaining 15 years. We typically align the term with children’s ages – to end when the youngest child turns 21, for example.
Inheritance tax doesn’t apply to everyone, because there’s a relatively generous nil rate banding. But if there is that consideration to be made, we would normally work with independent financial advisors or tax advisers to find the best way to structure someone’s protection.
There are actually specific insurance policies to protect against inheritance tax. Normally, when someone gives away some money, that can be subject to inheritance tax if they were to die within a certain time frame. We sometimes put an insurance policy in place to mitigate against that.
Ideally, your budget is what you can comfortably afford every month. Generally speaking, if you can aim for about 10 or 15 percent of your monthly mortgage payment as your protection budget, then that would put a fairly robust protection plan in place.
But we can work with whatever is affordable to you – we will find good value products to match your budget. Anything will put you in a slightly better position than having nothing set up.
It’s also better to get policies in place sooner rather than later. It’s better to be five years too early than five minutes too late.
There are many different types of cover out there, and there are a lot of decisions and considerations to make. While it’s easy to go onto a price comparison site and buy a product, you’ll be doing everything non-advised. More often than not, we find that people actually end up getting the wrong cover that doesn’t suit their circumstances.
The best thing to do is get advice, as we will talk you through all the important things to consider and design a plan that will make sure you are well looked after should things ever go wrong.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE