David Sharpstone returns to the Mortgage and Protection Podcast but this time to explain the importance of having mortgage protection in place and the types of policies available.
Why is Mortgage Protection so important?
If you’re buying a home, for most people you’re taking on the biggest debt of your life. If you are unable to repay that debt, through something that you haven’t planned for, then you need to be in a position where your home isn’t going to be taken away from you. If something happens to your health and you can’t afford your mortgage you need protection in place.
What about mortgages that have been completed without Protection?
Statistics show that around 70% of people with a mortgage don’t have any kind of protection. Unfortunately some people look at the cost and feel it’s an unnecessary cost. Even if you’re in great health, life is unpredictable and that could change at any time.
An important part of our job is to put our customers in the mindset of how they would cope if they didn’t have an income coming in. The implications of not protecting your income or home can be loss of your home. Often these insurance policies are quite affordable, however.
Why do we need Life Insurance?
Life Insurance will pay out a tax free lump sum in the event of death. Anybody who is single and has no children, might not need Life Insurance, as what happens to your home or finances after death are less important to you. If you have a partner or children, however, you don’t want them to be evicted if they can’t afford to pay the mortgage without your income, so Life Insurance would offer them protection. Therefore Life Insurance really varies in value, depending on your lifestyle.
Do I need critical illness cover?
There is a lot of positivity surrounding buying your house, but it’s important to consider what would happen to your home and your family, should you become ill and unable to work. It’s strongly recommended that anybody with a mortgage should have critical illness cover because the chance of getting ill throughout the course of your mortgage term is far higher than the chance of dying, for most people.The chance of having cancer, for example, is almost one in two. Heart attack, stroke or multiple sclerosis are also common reasons that people’s income may be affected during the course of their mortgage term. Although it’s often possible to return to work after treatment for these conditions, it’s important to ensure your home and bills are paid for whilst you are receiving treatment.
What is income protection?
Income Protection is a form of sick pay cover. So if you’re employed, but cannot work because the doctor says you can’t do your job, company sick pay will usually range from nothing to six weeks. Statutory sick pay is around £94 per week which won’t cover bills for many people, so income protection or sick pay cover is an income replacement. It’s designed to provide you with a monthly salary if you cannot do your job, when your company stops paying you sick pay.
We advise our clients to take an Income Protection Policy that would pay out from when their company stops paying, then you’ve got an insurance policy that can potentially pay you right up until the day that you retire. It’s even more important for Self-Employed people. For clarity Income Protection is just for sicknesses and it doesn’t include redundancy.
What is family income benefit?
It’s advisable for anyone with children to take out Family Income Benefit. It can either pay out on events of death, like a life insurance policy, or critical illness, but rather than paying a tax free lump sum, instead, it pays out a tax free monthly amount. It’s possible to set that amount to whatever your monthly bill payments would be, were either or both parents become ill or die. We can actually set up Family Income Benefits in such a way that the Guardian will actually receive money in trust, in the case both parents are lost, and that it will only be allowed to be spent on the children.
Can you combine policies?
There’s something called a planned charge, which is basically an administration fee built into the monthly cost just to have that particular benefit. If you had separate insurance for life cover, critical illness cover, family income and for income protection, you potentially have four plan charges. What you can do is have all of the benefits as individual self contained benefits just on one plan and only pay one plan charge, with multiple benefits.
It’s often a lot easier to manage when you’ve got one direct debit, so a combined policy is often, but not always, the best advice.
How much should I budget?
It depends what you feel is important. I would always recommend full protection to my client, but that can be quite expensive. The cost could vary enormously based on your own health and depending on the size of the cover, as well as how much benefit you need.
In a lot of scenarios basic life cover will provide some help, but it depends what the needs of the individual are. Mortgage insurance should be considered early on as a part of your mortgage budget. 10 -15% of the monthly mortgage costs is a loose gauge for cost. So, if your mortgage is a thousand pounds a month, then roughly speaking, you would typically spend between an extra £100 -£150 on top to provide you with some level of cover.
How can the Mortgage Advice Centre help with your Mortgage Protection needs?
It’s unwise to take on a big financial commitment such as a mortgage without protecting yourself from life events. Nobody knows what’s around the corner. My recommendation will always be fully protected. If you do have any further questions on anything we’ve discussed here, just navigate to the contact page and get in touch with a member of the team.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.