Life can be unpredictable

Homeowners have many financial responsibilities, including a mortgage, their most significant monthly outlay. Understandably, some people may hesitate to pay extra to protect these payments in case of illness or death.

This is particularly true if they’re relatively young and still in their first home. However, the recent pandemic has shown us that life can be unpredictable. Illnesses or accidents can occur unexpectedly, preventing us from working and earning an income. Therefore, it’s crucial to understand the options and costs associated with protecting your ability to keep your home, even in the face of adverse events.

WHY CONSIDER PROTECTING YOUR MORTGAGE PAYMENTS?

If you have dependents or a partner who earns significantly less than you do, knowing that your mortgage payments are secure in case you’re unable to work can alleviate stress during difficult times. The last thing anyone would want is for a loved one to be forced to sell or rent out their property because they cannot keep up with the mortgage payments.

However, if you live in your property and don’t have any dependents, critical illness cover might be sufficient. Also, some employers offer ‘death in service’ policies and comprehensive sickness coverage, which could eliminate the need for personal policies.

HOW CAN YOU INSURE YOUR MORTGAGE PAYMENTS?

There are several ways to protect your mortgage payments:

Income protection insurance: This can support you if you’re unable to work due to illness or an accident. Unlike other types of insurance, income protection insurance provides regular payments that replace a portion of your income during this challenging time.

Here’s a closer look at how it works. It is designed to provide financial support when you cannot earn an income due to sickness or injury. It typically pays out between 50% and 65% of your income, ensuring you can still cover your living expenses even when you can’t work.

The payout continues until you can resume work or until you retire, pass away or reach the end of the policy term, whichever comes first. This means you have ongoing coverage throughout your working life for peace of mind. One of the critical aspects of income protection insurance is its comprehensive coverage. It covers most illnesses that leave you unable to work, either in the short or long term, depending on the type of policy and its definition of incapacity.

This wide-ranging protection makes it a valuable addition to your financial plan. Another important feature is that you can claim as many times as you need while the policy lasts.

This is unlike other types of insurance, where there might be restrictions on the number of claims. Income protection insurance usually includes a waiting period known as the ‘deferred’ period. This is when you have to wait before the payments start after making a claim. Typical waiting periods are 4, 13 or 26 weeks, or even up to a year. The length of the waiting period affects the cost of your premiums.

The longer you can wait before receiving benefits, the lower your monthly premiums will be. This allows you to tailor the policy to your financial situation and needs.

CRITICAL ILLNESS COVER

This cover is insurance that provides financial support if you’re diagnosed with a severe specific condition. It offers a tax-free, one-off payment that can be used to cover treatment costs, mortgage or rent payments, or modifications to your home, like wheelchair access. Critical illness insurance pays out if you’re diagnosed with one of the specific medical conditions or injuries listed in the policy. The payout is made once, and after this, the policy ends.

This means it’s crucial to understand precisely what conditions are covered under your policy. The list of covered conditions can vary significantly between different insurers. Some comprehensive policies cover 50 or more conditions, while others might be more limited. Typically, the specified conditions that might be covered include:

• Stroke
• Heart attack
• Certain types and stages of cancer
• Conditions such as multiple sclerosis
• Major organ transplant
• Parkinson’s disease
• Alzheimer’s disease
• Traumatic head injury

Most policies will also consider permanent disabilities resulting from injury. Some policies offer a smaller payment for less severe conditions or of one of your children has one of the specified conditions. Not all conditions are covered under critical illness insurance.

If you cannot work due to a severe illness, you might assume that your employer will continue to provide some income level or that you can rely on state benefits. However, employees are usually moved on to Statutory Sick Pay within six months, and more than state benefits might be needed to replace your income if you can no longer work.

Critical illness cover can provide a much-needed financial lifeline in these situations, helping you maintain your lifestyle and meet your financial commitments without adding extra stress during an already challenging time. Always ensure you fully understand the terms of your policy, including what illnesses and conditions are covered, before making a purchase.

PAYMENT PROTECTION INSURANCE

How would you manage your mortgage or credit card repayments if you lost your job? Redundancy insurance might be worth considering. While no policy can provide fail-safe redundancy cover, some could help you through a difficult period.

However, it’s crucial to understand what you’re buying to prevent investing in an unsuitable product.

Different types of redundancy insurance:

Mortgage Payment Protection Insurance (MPPI): Often taken out alongside a mortgage, this insurance typically starts paying your mortgage repayments three months after your earnings stop. It continues to pay out for up to 12 months, helping you keep your home during a challenging period.

Short-Term Income Protection Insurance (STIP): This insurance replaces a proportion of your income for a fixed period (usually 12 or 24 months). It’s important to distinguish this from other income protection policies, which generally won’t pay out if you lose your job. Redundancy insurance can be a lifeline during tough times, but ensuring your chosen policy suits your needs is crucial.

Always check the terms and conditions, including any exclusions, waiting periods and the duration of payouts. Furthermore, consider whether the policy covers only specific debts, like a mortgage or loan, or if it provides a replacement income. The latter can be more flexible, allowing you to decide where to allocate the funds.

Remember that redundancy insurance is typically designed to cover short-term financial gaps. There may be better solutions for long-term unemployment or career changes. Always consider your circumstances and seek professional advice when necessary.

LIFE INSURANCE

Life insurance is designed to provide peace of mind that your dependents, such as your children or partner, will be financially secure in the event of your premature death. When purchasing life insurance, several factors need consideration, such as the type of policy you want, when you need it and how to buy it. Life insurance pays a lump sum or regular payments upon your death.

This provides your dependents with financial support after you’re gone, helping them manage without your income. The amount of money paid out depends on the level of cover you buy. The higher the cover, the larger the payout. However, this also means higher premiums, so balancing affordability and ensuring your loved ones are adequately provided for is crucial. One of the advantages of life insurance is its flexibility.

You decide how the payout is made, whether it will cover specific payments like mortgage or rent, or if it’s intended to leave your family with an inheritance. This allows you to tailor the policy to your family’s needs and circumstances. Choosing the right policy is one of the most important decisions when buying life insurance.

There are various types of life insurance policies, including:

Term Life Insurance: This policy covers you for a specific period (the ‘term’). If you die during the term, the policy pays out to your dependents.

Whole Life Insurance: This policy covers your entire life and guarantees a payout upon your death, as long as you continue to pay your premiums.

Income Protection Life Insurance: Instead of a lump sum, this policy pays out a regular income to your dependents upon your death. Generally, it’s worth considering life insurance if your death would cause financial strain to your dependents. This could be the case if you have young children, a partner who relies on your income or a family living in a house with a mortgage that you pay.

ACCUMULATING SIGNIFICANT SAVINGS

Alternatively, you could save money to cover payments in worst-case scenarios. However, this might only cover some costs, especially if the primary mortgage payer becomes ill or passes away before accumulating significant savings.

HOW MUCH DOES IT COST?

The cost of protecting your mortgage payments varies depending on the type of protection chosen, your age, health status and occupation. Younger, healthier individuals with safer jobs generally pay less.

Don’t forget, our professional friendly advisors are on hand to support you and can help you explore all of your options.

*** The information in this article is purely informative. Buildings and Contents insurance is available in the market, but we do not offer this service in-house at Charles Cameron & Associates.