First-Time Buyers & Home Movers – which type of policy is right for me?
Whether you are buying your first home, moving house or remortgaging, it is a good idea to review your insurance requirements.
The main area of concern for most people is what would happen if you or your partner were to pass away. Life Insurance is a way of ensuring funds are available to repay the mortgage, should the mortgage owner pass away. The most cost-effective policy is a Decreasing Term Policy which means that the initial sum assured is the same amount as the loan. The sum assured reduces over time as the mortgage is repaid.
Alternatively, there are Level Term policies available, this means that the sum assured remains the same throughout the term. This provides additional financial security to the beneficiaries, as the mortgage loan reduces over time.
These plans can be set up on an individual or joint basis.
Could you afford your mortgage repayments should you be incapacitated due to an accident, injury or illness?
Most people do not consider the implication of an accident, injury or illness which stops them from being able to work. Do you know how long your employers would provide sick pay? Some people have excellent benefits at work but that is the exception, rather than the norm. It is highly recommended you look into this as if you can’t work and you no longer get paid it is not only the mortgage you need to pay but also basic bills such as food and utilities.
Income Protection policies are designed to provide cover for this. These policies provide a monthly ‘income’ of up to 70% of your gross income should you be signed off work due to ill health or injury. The policies are also available to a house person or a full-time carer. Income Protection plans are available up to a maximum term which runs until the expected retirement date. A ‘deferred’ period is chosen at the outset and usually matches the sick pay available from work. This means that the monthly income is available, after the deferred period has ended, following the first day of ill-health.
Have you considered the implications if you or your partner suffered a serious illness like Cancer or Cardiac Disease?
“Don’t worry, I am fit, healthy and young, I can’t see myself having a serious illness”…until it happens! If it does it is then too late to insure. The best time in your life to think of this cover is when you are fit, healthy and young. This makes it the most cost-effective it will ever be. The average age of a critical illness claimant with Legal & General in 2022 was 48 years. Source: Legal and General May 2023.
Ideally, you should purchase enough cover to help you get back to full fitness, perhaps helping to pay for medical treatment which would otherwise be unavailable or altering your home to accommodate any possible disability. If affordable, you could also cover any debt, such as a mortgage.
Mr and Mrs S are looking to purchase their first home. They are both 33 years old, non smokers and in work. Mrs S is the main breadwinner, earning £3000 per month gross. They are looking to borrow £200,000 on a repayment basis over 25 years and have no other insurance in place.
Money is tight as they have put most of their savings into the deposit and are borrowing as much as they can afford. Their first instinct is to purchase life insurance, including critical illness, so if either of them pass away the mortgage is paid off. We looked at a joint decreasing life insurance policy, which reduces in line with a repayment mortgage. This would cost £73.22 per month to include critical illness or £11.22 per month without.
It is also important for Mrs S to consider protecting her income as she only gets 4 weeks sick pay from work. We looked at full income protection of £2,000 per month for a monthly premium of £52.68. To keep costs down they opted to only protect 30% of her income as if needed, Mr S could earn a little more to cover the main bills. To further reduce the cost we looked at a short term payment policy which would pay an income for 2 years in the event of a claim. This would cost £25.67 per month.
Critical Illness cover is also considered but as it can be quite expensive they could not afford to cover the full mortgage. Instead they opted for two smaller level policies so if either of them suffered a Critical Illness they could focus on that, rather than have additional financial pressures, which often make these situations much more stressful. We looked at £20,000 over 35 years, for a monthly premium of £9.32 for Mr and £9.16 per month for Mrs. As it is not linked to the mortgage it becomes a personal cover in addition to the basic life cover for the loan.
This means they can insure for most situations for £150.80 per month or to purchase a little Life, Critical Illness and Income protection could cost as little as £53.44 per month.
In the future, if they have not had any medical issues, they will consider increasing the income protection on Mrs S, taking some out for Mr S and possibly topping up their critical illness covers.
*Please note that any premiums mentioned are indicative only and based on this specific example, which is shown for information purposes only. Premiums shown are an average of the 5 cheapest insurers. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.
Quotes provided July 2023.