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Stuart Bruce from Heritage Mortgages talks us through mortgage protection: why this is so important and the different types of cover available.
Why is mortgage protection so important?
The reason mortgage protection is really important, especially if you’ve got a family and young children, is that if you don’t have it in place, and the worst happens to you, your property could be at risk. Lenders will always provide funds for you, as long as you meet the lending criteria, but obviously, payments always need to be up to date.
A mortgage is probably the biggest investment that someone’s going to make in their life. People insure their car, their pets, but if they don’t have mortgage protection cover, they could be putting their family at risk if payments become unaffordable after they’ve passed. It doesn’t have to cost an enormous amount of money, but it’s really important to consider cover when you take out a mortgage.
What about mortgages that have been completed without protection?
Although it is a bit of a morbid subject, misfortune can happen to anyone at any time. You don’t necessarily have to be elderly or in poor health for something awful to happen to you. Those who have chosen to think about mortgage protection and do it later on, when something happens in the meantime, then they have no cover.
There is also a problem that can come along with mortgage protection plans, in that, if someone should have an illness or accident prior to taking out cover, they may be in a position where they can’t take out protection cover in the future.
Is there a right age to look into mortgage protection?
The younger you are, the cheaper it is going to be. In fact, with younger applicants, often the cost of cover falls below the minimum premium. The younger and healthier you are, the cheaper the cover is. And when you’re talking about mortgages, it doesn’t cost a lot to provide some essential basic cover.
Why do we need Life Insurance?
Regardless of whether you’ve got a mortgage or not, Life Insurance is there for people to ensure that their family is financially secure, once they have passed. There are many different areas of Life Insurance, it’s got many different areas, but it is essentially designed to prevent life events from throwing them into poverty. It can support a family in maintaining their usual lifestyle.
When organising Life Insurance alongside a mortgage, many people take out Mortgage Decreasing Cover, meaning the plan will always ensure that should the worst happen to you, your mortgage would be fully repaid. It does reduce the cover in line with your mortgage over the years, and is the cheapest way to cover your mortgage.
You can opt for Level Term Life Cover, which people will take out whether they’ve got a mortgage or not, because it provides a lump sum of money for family and children in the event of the worst happening. Level Term life cover never reduces over the chosen term of years. You can also make sure that this keeps up to date with indexation, retail price index or percentage you want to increase.
You can have it on guaranteed premiums, so that once your policy is underwritten, your premiums will never go up, or you can have a Renewable Premium Cover, which starts with a lower premium initially, but could rise over the years.
Do I need Critical Illness cover?
Whether or not somebody would need Critical Illness Cover is down to the individual. If it’s affordable, it’s always recommended, because Critical Illness cover is subtly different from Life Insurance. If a critical or terminal illness is discovered, Critical Illness Cover provides a tax free lump sum at the time, rather than after death.
The diagnosis doesn’t have to be terminal, it could be life changing, for example, Parkinson’s disease, which is life changing, but won’t necessarily cut your life short. Critical Illness cover
Can help you go on to live a number of years, with financial support.
What is Income Protection?
Older Income Protection Policies were known for being very expensive, however, nowadays policies have been adapted in many ways. They are designed to provide you with an income, should you need to be off of work through sickness or injury, for more than a certain period of time, typically more than four weeks.
The longer the deferred period before your policy kicks in, the cheaper the premium is.You can have plans that will pay you for, twelve months after you become ill. It would provide you with a tax free lump sum of money every month for twelve months after your deferred period.
Many people with a mortgage take out Income Protection so that if they were off sick for a period of time, it could pay their mortgage payments, council tax and utility bills. It provides an income that you may not be able to get in the longer term from an employer, as generally, the longest someone would receive full sick pay from their employer is about six months.
You can have a deferred period of six months and to coincide with the end of your company sick pay.
Just to clarify, this is just for sickness. It doesn’t cover redundancy, however Accident, Sickness and Unemployment Cover is generally available if you wish to cover for all eventualities.
What is Family Income Benefit?
Otherwise known as Family Income Protection, this is a life insurance policy that, instead of paying a tax free lump sum, pays a tax free monthly amount of income to a survivor or to a survivor family. A parent may wish to cover their child until the age of around 23, so the policy would provide a monthly amount of money to the surviving parent, to support their living costs until they reach that age. Lots of people will have this in addition to their normal life insurance, because both can be claimed, to maximise the benefit to your surviving relatives.
The cost is based on your age, occupation, and similar lifestyle factors, however, it’s fairly affordable. If you have less than twelve months to live, most plans will pay early, so it’s important to mention this when organising your cover.
What is Relevant Life Cover?
Relevant Life Cover can be taken out by employers as a form of death in service benefit. A company could provide Level Term Life Cover which will pay out to a member of staff and their family or the directors of that company.
This is the type of cover provided on a private basis as an employee benefit. Businesses can claim corporations tax back on the premiums annually, so it is mutually beneficial to the company and their employees.
What about planning for Inheritance Tax?
Any life insurance can be put into trust, which means that you direct what happens to the money and who the beneficiaries will be, after you’ve passed. As this will sit outside of your family wealth, it can be used to negate Inheritance tax or even to pay some. We don’t give advice on that, and this is something you should really take professional financial advice about.
Can you combine different policies?
Yes, it’s possible to combine benefits by creating a multi benefit plan. Discussing protection needs with an individual is about finding out what’s important to them. If somebody felt that it was important for them to have life cover and income protection, they can put those together all on one plan. They can also have single entities with different companies.
Sometimes people are more concerned with price, whereas others prioritise the quality of the cover, but whatever you choose, when taken with one provider, it’s possible to put it all together. Some companies will give a small discount for this as well, due to a reduction in policy administration.
How much should I budget?
Everybody has different needs and an idea of what is affordable to them, so trying to determine this on behalf of someone else is really difficult. With regards to protection taken alongside your mortgage, 10% to 15% of some of the monthly mortgage pain is a good rule of thumb.
There’s no right or wrong when it comes to budget, it’s going to depend very much on the individual and their needs, as well as their circumstances. For example, someone young and healthy can expect much cheaper premiums than an older smoker. Your smoker status can actually make a big difference to your premiums, however, if you should stop smoking for more than twelve months, your insurance policy can be re-assessed.
Getting in touch with Heritage
If you have any other questions related to mortgage protection or insurance policies, visit the contact page to speak to Stuart or another member of the team. We’re happy to help anybody, any time.
I cannot express the quality of service received as a first time buyer from Luke at Heritage Mortgages. No query to big or small, with quick responses alongside an exemplary level of service, Luke secured a great result during the pandemic so I could purchase my beautiful new home. Great market knowledge surrounding self-employed earnings was clearly evident and secured the desired result. Thank you!
Annabelle is a top notch Mortgage broker. She took a year of silly questions, being stupid and setbacks from me and she stuck by me and got me my mortgage on my first home. She’s an excellent person who just thoroughly loves her job and wants to see people happy in their homes. Could not recommend anyone higher! Thank you Annabelle.
Highly recommend Annabelle, she is a fantastic broker, she sorted our remortgage in a flash! My hubby and I were concerned about the process due to him being self employed but Annabelle got us a DIP in no time at all, a mortgage offer within days and I’m happy to say we’ve just completed. We couldn’t be happier with the service we received, it was faultless – thank you! So if you are reading this and like us you are hesitant about speaking to a broker I’d say just do it, Annabelle took away all the stress and got us a great deal. 💕