What Protection Should I Consider When Getting A Mortgage?
What protection should i consider when getting a mortgage?
For most people, the biggest expense in life will be the mortgage for their house, so it makes sense that you think about getting protection in case you need help to pay your mortgage at some point in life. According to The Money Advice Service, over 1 million people in the UK find themselves out of work due to illness or injury each year, leaving them in financial difficulty with many unable to afford mortgage repayments.
If you find yourself out of work, or become ill and unable to work, you might find that you are in the unfortunate position of not being able to keep up with your mortgage payments. That is why it is important to consider your insurance protection options when you take out a mortgage.
What types of protection are available?
There is a range of different types of protection for different situations and eventualities. The main types of protection that you should consider when you take out your mortgage are: Life Insurance, Critical Illness Cover and Income Protection.
In addition to this, you will require buildings insurance, which is usually a requirement for your mortgage company to protect their loan in case the property is damaged. Contents insurance is another type of insurance that you can get to cover your belongings against theft and damage.
To help you to decide whether you require any of these types of protection, here are the summaries of what they cover you against:
It is never a nice thought to think about what should happen if you die but if your death could leave your family in financial difficulty and unable to pay for the mortgage then it is better to cover against this possibility. When you take out life insurance you pay a monthly premium and if you were to die during the term of your policy, your family will receive a lump sum. You can also choose a policy that pays an amount each month that will ensure that the outstanding mortgage is paid off so your family do not have the additional stress of potentially losing their home.
The cost of life insurance varies and is based on a number of factors such as your age, gender, health, genetic medical history and whether you smoke. Some insurers will also take your occupation and hobbies into account, as you may be rated as a higher risk. It is worth noting that life insurance covers you throughout the term of the policy that you agree. To cover yourself until you die (so without a policy end date) would require a Whole of Life policy.
Critical Illness Cover
Whilst life insurance will provide a lump sum payment if you should die, critical illness cover provides you with a lump sum payment if you are diagnosed with a certain type of illness or condition.
If you were to be diagnosed with cancer for example, or have stroke, this may affect your ability to work, not only through any treatment but subsequently. By taking out critical illness cover, you will not have to worry about how you will be able to keep up your mortgage payments and other bills whilst you are unable to work.
When you are taking out critical illness cover, you should always check which illnesses are covered, as certain illnesses that you may have expected to be covered might be excluded. Most insurance companies will include cancer, heart attack, stroke, MS or Parkinson’s disease but you should check with the company that you are thinking of taking a policy out with and speak with a Protection Adviser if you have any questions around certain illnesses that you require cover for or have concerns about (for example, a family history of cancer).
There are three different that both Life Insurance and Critical illness policies can bet set up:
Similarly to how your mortgage payments decrease over the period of the loan, decreasing term critical illness cover will protect your mortgage to ensure that you are able to keep paying your mortgage. The lump sum you get decreases as your mortgage loan decreases.
There is no variance in the payout sum, so the cover applies for the same amount at any point of the policy.
As your living costs will inevitably increase over time, there is also the option to take out increasing cover that will stay in line with inflation, so that the rising cost of living does not stop you from being able to pay your mortgage off.
Some insurance companies will allow you to combine life insurance with critical illness cover, to give you protection in both situations.
An income protection policy provides you with a monthly payment (often a percentage of your income) in the event that you no longer receive income as a result of illness or injury.
How long would you receive sick pay for if you were off work? How long could you manage if your income were to stop? Income drives everything and no matter how sick you are companies expect their bills to be paid. Peoples benefits vary wildly in regard to sick pay, from those who receive generous amounts to others who receive none at all. An income protection plan will start paying you a monthly amount of money once your workplace benefits have ended. This is referred to as the deferment period and can range from 1 month to 12 months dependant on providers. It will continue to pay the benefit until either the policy ends or you are able to go back to work.
Income protection differs from Critical Illness as it is generally occupation based rather than definition based. It can therefore provide cover for things like stress or back problems – things that would not be covered in a Critical Illness plan. There are various ways in which these plans can be set up so it is important that you speak with an adviser to get the right plan for your circumstances.
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Before you make a decision on whether to take any of these types of protection out, you should have a thorough check of your financial situation to calculate how much you would need each month in order to pay all of your bills. If government benefits would not cover those outgoings and you do not have a family member who could take over those payments, then critical illness cover or income protection could be the right option for you.
Likewise, if you died you need to think about the financial impact on your family and if they would struggle to pay a mortgage without you then life insurance would be a good option to ensure that they can stay in your home.
It is also very important to check the full details of what is actually covered and remember that if you were to give any kind of incorrect information regarding your health, for example, insurance companies could void your policy. If you are looking for peace of mind in case of an unexpected situation then you should definitely consider one or some of these protection policies.
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