What Insurance do I need with my mortgage?

What Insurance do I need with my mortgage?

Life insurance? Or, Critical illness insurance maybe? These products are important and worthwhile if you are taking out a mortgage.

But, what about the potentially greater risk of going off work sick? Who will pay your monthly mortgage payments? You can’t claim on your Life or Critical illness plans. Because these only come into force upon death or upon diagnosis of a critical illness covered by your policy. 

There is a general insurance solution called mortgage payment protection insurance ( also known as Accident, Sickness and Unemployment insurance) which limits claim payments to two years, but what about something that pays a benefit for a longer period for accident and sickness?

Income protection is the solution, it isn’t always associated with protecting a mortgage, but it should be.

It helps to protect your income if you are unable to work as the result of an accident or sickness and could provide you with a tax-free income. The length of the claim period is typically one/ two or five years. Or you could opt for your benefit to continue to pay out until you are either able to return back to work or until you retire.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on your individual circumstances.

This type of insurance can be tailored to your specific circumstances.

Just another premium – I won’t need to protect my income?

The terms and conditions of mortgage products always carry a risk warning which reads along the lines of: “YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED ON IT.”

But what exactly are those risks?

The average age of a first-time buyer in England is currently 33 years old.* What are the chances of something happening that could stop someone from being able to pay their mortgage repayments?

According to Royal London’s Protection Risk Report ( June 2019) for a male, non-smoker, aged 33 with a mortgage taken out for 30 years. There is a 3% chance of death and a 9% chance of suffering from a critical illness.

However, there is a 23% chance of him being unable to work for a period of two months or more during the term of his mortgage. This represents a one in four chance.

This example is based on individual cover. However, as most mortgages are taken out on a joint-life basis, the chance of something happening to one of the mortgage holders is even greater.

And yet, far more life and critical illness cover is taken out each year by people with mortgages compared to income protection.

Why do people with mortgages need income protection? Because the risks of going off work sick are far higher than death or becoming critically ill.

Isn’t it expensive?

Because the risks of going off work sick are high. It makes sense that income protection plans should carry a higher premium cost than life cover. 

Income protection plans have more adjustable elements that can be used to influence the cost of premiums. But, what is most important is that the cover fits within your budget.

  • The longer the claim payment term, the more expensive the premium. Limiting the payment term can significantly affect the premium. The payment term can be limited to five years, or until the mortgage ends or retirement.
  • The amount of cover. The more cover you opt for, the more expensive the plan will be.  Income protection plans do have maximum levels of cover that people can take out based on their incomes. Do you need the maximum amount of cover possible, or just enough to cover you monthly mortgage payment and regular household bills?
  • Choosing a longer waiting time between falling ill and the payment of cover can also help to reduce the premium. This is because it reduces the insurer’s risk and is called a ‘deferred period’.

An example premium £

Using the same example as previously: Male, non-smoker, aged 33 with a mortgage taken out for 30 years. Insuring for £1,000 a month income protection policy on an indexed linked basis (RPI). His occupation is an accountant. He needs a 13 week (three months) deferred period plus he wants cover for the length of his mortgage which is 30 years. 

For an income protection plan with a five year payment period, this would mean any claims he makes would be paid for a period of up to five years.

This would cost just £17.07 per month **

The way forward…

Losing income through sickness and the subsequent inability to keep up those monthly mortgage payments is precisely what that risk warning on the key facts illustration is referring to.

Sources:

* Office for National Statistics: English Housing Survey 2017 to 2018. Published 31 January 2019

**2. Royal London figures correct as at 31 July 2019 Please note that the premiums provided are indicative only and are based on this specific case study/ example, which is shown for information purposes only. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.

Cover Magazine August 2019

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