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Gavin Burrows, Director of Fifty Nine Financial talks us through mortgage protection, the policies available and what these mean.
Why is mortgage protection so important?
When it comes to Mortgage Protection, there are a number of ways that you can provide some type of protection for your mortgage debt. When entering into a mortgage agreement, you’re effectively borrowing quite a large amount of money over quite a long period of time and committing to regular monthly payments. More often than not, this will be the biggest financial commitment that you ever make.
Depending on whether you’re a single person or a couple, there may be different ways that you choose to approach protecting your mortgage. For a single person with no dependants, the requirement for basic life insurance is debatable, because if you’re a single person, you wouldn’t necessarily be leaving a financial burden to anybody else. Whereas if you’re a couple and both of your incomes are essential for maintaining your mortgage payments, your surviving partner will need to worry about paying off your mortgage, at which point life insurance becomes essential.
For a single person, income protection is possibly a more suitable type of insurance for protection, but equally, for most people, some type of income protection can be vital.
What about mortgages that have been completed without protection?
Part of the problem is that people don’t want to think about it, but if somebody chooses to complete a mortgage without protection and the people named on the mortgage were to die, then the lender would typically require that mortgage debt be repaid.
If you’re in a couple and you’ve got no mortgage protection and one of the couple were to die, then the surviving partner is going to be expected to cover your mortgage payments, assuming they want to continue to live in that property. If it’s a longstanding family home with surviving partners and children, they’re probably not going to want the upheaval of moving house in a time that is already traumatic.
Why do we need life insurance?
Life insurance is most important for families or certainly couples, as it helps those left behind to maintain mortgage payments if you die. It’s equally important regardless of the type of mortgage, as whether it’s a residential home, or an investment property that you may want to pass onto family members posthumously, as it won’t be possible to simply transfer the mortgage over when you die.
What is critical illness cover and how does it differ to life insurance?
Life insurance pays out when a person dies or is possibly diagnosed with as terminally ill. Critical illness cover is a policy that could potentially pay out a lump sum upon diagnosis of a specific illness that may be covered by the policy. Hopefully an illness that you can recover from.
The quality of the insurance policy becomes very important, as each policy varies dramatically with each policy provider. It’s therefore important that, as brokers, we provide the type of cover that’s going to ensure that people are covered for the most amount of illnesses and the broadest amount of definitions, where possible.
People would immediately think of a heart attack, cancer or stroke as being a critical illness, but there’s a whole list of varying conditions and definitions, which is why speaking to an adviser is so important when you’re looking for critical illness cover.
Fundamentally, everybody wants to know that they’ve got the best level of cover that they can get, but if you go into the critical illness market with no knowledge, you could quite easily end up taking out a policy that isn’t giving you the level of cover that you would perhaps expect.
We don’t need critical illness cover from the perspective of a mortgage provider’s requirements, but critical illness cover is one of the most important insurance policies anybody could have. Unfortunately we all know people who have had illnesses, it’s a reality of life, so from that perspective, critical illness cover is a very important type of insurance for people to consider having.
What is income protection?
Income protection is a very different type of policy to life insurance or critical illness cover, as with those, typically you’ll receive a lump sum payment, which is variable depending on your level of cover that you’ve applied for. When you have an income protection policy, you would receive a regular monthly cash payment that’s tax free. This is intended to replace a percentage of your normal income if you’re ever unable to work due to an illness or an injury.
What is family income benefit?
If a person takes out a family income benefit policy and they were to die, their family could receive a monthly benefit over a set period of time. For example, you may take out a family income benefit plan that could provide your family with two thousand pounds per month, up until your child’s twenty-first birthday.
Can you combine different policies?
Most insurance companies nowadays will provide what is often referred to as a menu plan. This is where you would have more than one type of insurance policy on the same plan. For example, you may have some life insurance, an income protection policy, and a family income benefit plan. We would apply for them all at the same time with the same insurance company and they would all be covered under one umbrella.
You are free to apply for policies with different insurance companies, but that involves separate applications, different medical underwrites etc, so if you’re looking for more than one type of policy, then typically it does make things a little bit smoother if you put them all together under one plan.
What about planning for inheritance tax?
Inheritance tax planning can get quite complex. In short, if you have a relatively large estate that you plan to leave to family members or anybody in particular, there may be a tax liability that’s associated with that estate. It can often be advantageous to take out a whole of life policy to help to mitigate the inheritance tax implications that your family or those inheriting your estate may be faced with, further down the line.
You would hold a life insurance policy that pays out a certain amount when you die and that amount that’s paid out could be used to pay the inheritance tax liability at the time of your death.
How much should I budget for protection?
Some clients have insurance policies that might be £10 per month, but some are paying up to £500 per month for their policies. Depending on where you sit on the financial spectrum, either of those might sound unusual or large or small, but ultimately providing protection advice is about establishing what the individual’s budget is, what they’d be comfortable contributing towards that type of cover.
We then work with that budget to find the most appropriate type of protection plan that we can for the individual. It’s very, very hard to say what somebody should budget because it varies so dramatically based upon the individual circumstances. The things that ultimately affect the price of insurance are your age, whether or not you smoke and if you’ve had any medical complications in the past.
How can Fifty Nine Financial help?
If you’d like to have a chat with us about anything that we’ve mentioned regarding protection, navigate over to the contact page and send us a message and we will be sure to get in touch as soon as possible.