Mortgage Protection – What you need to know
What insurance do you need for your mortgage?
There are four main types of protection that you need to consider when it comes to your mortgage.
- Buildings and contents insurance
- Income protection
- Critical illness cover
- Life insurance
Buildings and contents insurance
Buildings insurance covers the cost of repairing any damage to the structure of your property and it is mandatory that you have buildings insurance when it comes to getting a mortgage. Buildings insurance doesn’t just cover the shell of your house, it also covers the likes of garages, sheds and fences.
Contents insurance covers all of your personal belongings that are inside your property and aren’t fixed to the shell of your home. A good way to remember what is covered by each is, if you tipped your house upside down and shook it – whatever falls out would be covered by contents insurance and whatever stays in the property would be covered by buildings insurance!
Income protection insurance provides you with a monthly security to ensure you can remain financially stable and cover your outgoings (e.g mortgage payments) if you happen to fall sick and are therefore unable to work and bring in an income. It’s a form of protection that can cover you up until retirement age if you so wish.
You may be offered sick pay by your company if this were to happen, but if your sick pay doesn’t last longer than a few months, this is where income protection will come in!
There are different deferred periods when it comes to income protection. For example, if you had three months sick pay, you would have a policy with a three month deferred period and once this is over, your income protection policy will start paying a lump sum amount into your account every month.
When it comes to the amount you receive, you have the choice of going with a policy that matches your salary every month, or you can put forward a specified amount that will suitably cover all your outgoings.
Critical illness cover pays out a tax free lump sum when you are either diagnosed with a critical illness or when you are undergoing surgery for one of the critical illnesses stated in your cover. The lump sum payout is designed to help you and your family financially when you’re dealing with a critical illness, so the likes of your mortgage payments aren’t put at risk.
Each provider has their own list of what they class as a ‘critical illness’ so it’s important we compare different insurers and decide who is best to go with based on the policy and list of illnesses they cover.
Ideally, you would have a critical illness plan linked to your mortgage, so if you were diagnosed with a critical illness your mortgage would be paid in full, eliminating the stress of ensuring your monthly mortgage payments are paid on time.
Some people also consider a level term cover when it comes to their critical illness cover. This is where you pick the amount you want the policy to pay out and it would pay that amount out regardless of how much is left on your mortgage. There is a risk here that the policy could be claimed on at a time when your mortgage is much higher than what your level term policy will pay out. On the other hand, you could receive a pay out when your level term cover is more than what you have left on your mortgage payment.
What illnesses are deemed as critical?
As mentioned, the range of critical illnesses varies between each provider. However, most providers tend to cover:
- Heart conditions
- Brain conditions
- Injury from a serious accident
Do you need critical illness cover if you have life insurance?
Critical illness cover can cover you for illnesses that aren’t terminal – so it’s important to have both critical illness cover and life insurance as they are completely different policies.
Your family will only receive a life insurance pay out if you die from your illness, but critical illness cover will also provide you with financial stability even if the illness is curable (and you don’t have to pay a penny back when you recover!).
Life insurance is often considered one of the most important forms of protection, particularly when you have a family of your own.
Life insurance is often put in place at the time of your mortgage agreement and is most commonly designed to match the mortgage – this means that the amount the policy pays out matches the amount that’s on the mortgage. As is the case with critical illness, this does decrease in line with the mortgage balance. If you don’t want to have a decreasing term policy, you can also have level term insurance so you know exactly how much your life insurance pay out will be.
The choice of your cover essentially comes down to how much you think your family will need financially if you were to pass away.
What cover should you have?
If you’re buying your first home, it can be particularly difficult to know what protection you need.
An initial quote for the level of protection you want alongside your mortgage is done on your age and occupation. Once we have this, we then sculpt your policy to fit what’s important to you and what your budget is.
It’s important to remember that life insurance is extremely personal and there’s certainly no one size fits all price or policy.
Is mortgage protection expensive?
- Typically, life insurance will be the cheapest form of protection. Generally, for most of the mortgages we arrange, life insurance can be added on for around £10 a month.
- The cost of income protection insurance largely depends on your occupation. The riskier your occupation, the more expensive your policy is going to be.
- The cost of critical illness cover will largely depend on your age and occupation.
What tends to happen with most types of cover is you’ll get a quote based on the likes of your age and occupation and then you would complete a medical questionnaire with your chosen provider – the cost can then be altered depending on the level of risk your medical questionnaire presents.