Mortgage Protection
Something to Consider
Taking on a mortgage is likely to be one of the biggest financial decisions you will make in your life. As brokers, it is our responsibility to make sure you have considered what may happen if you are unable to keep up your mortgage payments in the event of illness, disability or death.
Unlike buildings insurance, mortgage protection is not mandatory, but it is something that needs serious consideration.
It’s not nice to talk about, but it’s necessary to have those conversations.
If you have used our mortgage services, then we will always ask if you would like to review your mortgage protection once your mortgage offer has been issued.
We can also discuss mortgage protection with you if you have arranged your mortgage directly with the lender or through another broker.
Mortgage protection is a term for a few different insurance products that are designed to be there as a safety net when the unexpected happens. These are generally Life Insurance, Critical Illness Cover and Income Protection.
Life Insurance
There are two main types of life insurance, and by far the most common for people with repayment mortgages is a decreasing term assurance.
Normally you would take out a policy for an amount that matches your outstanding mortgage balance. It will run for a specific term (the same as your mortgage term), and as time goes on, the amount of policy cover decreases along with the balance of your repayment mortgage. This means that if you were to pass away at any point whilst the policy is active, it would pay out a lump sum that can be used by your beneficiaries to repay the mortgage in its entirety. If you were to pass away after the policy term has ended, you do not receive a payout.
Decreasing term assurance is really helpful if you have family that depend on your income to pay the mortgage. The lump sum can take care of the mortgage payments and ensure your family can remain in their home when you are no longer there to provide for them.
The other type of life insurance is called level term assurance. This type of policy would pay out a certain amount at any time in the policy’s life – it does not decrease with your mortgage balance. As with a decreasing term policy, it only pays out in the event of death. Level term assurance is usually more expensive than a decreasing term policy.
The recommendation for life insurance if you own a house in joint names is to have a joint life cover policy. This would pay out should either of you pass away. It will only pay out once, on the event of the first death.
There are many other factors to consider when looking at life insurance, and it is best to discuss this with a broker. Everyone’s circumstances are so different that it is impossible to list all of the differentials here.
Critical Illness Cover
Critical Illness Cover is an insurance policy that pays out a lump sum amount if you are diagnosed with a certain serious illness that is listed in your policy. These are all subject to your policy’s specific terms and conditions, but some commonly covered illnesses are certain types of cancer, heart attacks, strokes, multiple sclerosis and more.
Just because an illness has the same name, it does not always mean you are covered. Each policy will have its own definition and eligibility for which it would pay out.
Upon diagnosis of a qualifying illness, you would receive the lump sum insured on your policy, which could be used to reduce your mortgage, cover household bills and expenses or adapt your home to meet your needs, amongst other things.
Income Protection
Income protection ensures you keep receiving an income if you are unable to work due to illness or injury. The level of cover is based on a percentage of your income; broadly speaking, you may be able to insure between 50-70% of your gross income.
This would be paid out as a regular monthly payment designed to help you continue to pay your bills and living expenses if you are unable to work for a period of time.
Unlike critical illness cover, income protection is not linked to any specific diagnoses, but rather whether the insurance provider deems you unable to work according to their policy definition.
If you qualify to make a claim on your income protection policy, then it would pay out after an agreed deferred period. It is important to know if your employer offers any sick pay or if you have any savings to cover this initial period.
Your policy will specify whether you will receive the monthly payment until you are able to return to work, or for a maximum amount of time.
What will be Discussed in a Protection Review with a Broker?
A broker would schedule an appointment with you in a comfortable and quiet setting to ensure complete confidentiality, as some of the personal details discussed could be of a sensitive nature.
During the appointment, the broker will need to ask questions about your health, medical history and any pre-existing conditions you may have. Your height and weight will be noted, along with your smoking status, alcohol consumption and drug usage.
You will also need to provide your GP details. Once the broker has given their advice and submitted a policy application, the insurance provider may want to request a report from your GP to verify that the details you have provided are accurate and up to date. You will need to give consent for the insurance provider to request the medical report from your GP surgery.
When will my Policy Begin?
The recommendation is for mortgage protection policies to begin on the day that you exchange contracts; this is because it is the day you become legally responsible for completing the purchase of that property.
The timing of other changes will depend on your personal circumstances and will be discussed with you by the broker.
How Often Should I Review my Mortgage Protection?
You should review your mortgage protection whenever a change of circumstances occurs. These can be changes related to the following:
Your mortgage – any time you come to remortgage, increase the borrowing, make a large overpayment or make changes to the term of the mortgage, you should review your protection.
Your income and employment benefits – you should review your protection needs if you have a significant increase in income, or there are any changes to your employment benefits such as death in service or sick pay benefits.
Your family circumstances – If you get married, divorced, have children or other people become dependent on you, you should review your protection needs. Our guide on what happens to the mortgage when you divorce covers the mortgage side of a separation.
Your health – making sure your current policies still meet your needs.
There are other changes of circumstances too which could warrant the need for a review, so we suggest routinely scheduling a review with your broker every one to two years.
