Mortgage
protection
Mortgages are most people's biggest financial commitment. So does it make
sense to a policy to cover you if you are suddenly unable to pay the monthly
bill?
Support by the state
No doubt some of us think that if we were unable to earn a living because
of sickness or injury or even unemployment, we would get help from the state
with the cost of our mortgage. That may have been so in the past, but since
1995, the rules have changed and it is now unlikely that you would get any
significant contribution towards your mortgage costs from the Department
of Social Security for almost a year. In other words, you are on your own!
It is a rather startling fact that 80 per cent of the population would not
qualify for any state help at all. Whilst lenders will often be sympathetic,
especially if you tell them as soon as possible that you have a problem,
there is a limit to how generous they can be. After all, they are commercial
organisations with their shareholders and other customers to consider. So
if you cannot pay your way, you will eventually lose your home. The tragedy
of repossession is played out daily in courts throughout the land.
Mortgage protection insurance
If the state will not help and the lender cannot help, it is up to you to
help yourself-and you can do this easily by taking out mortgage protection
insurance. Often referred to as accident, sickness and unemployment (ASU)
cover, this costs perhaps £5 or £6 for every £100 you pay
each month.
One catch, however, is the "waiting period". Most ASU policies do not pay
out until you have been unemployed or sick for three months. After that,
these policies tend to pay out for one year.
ASU will cover not only the cost of your mortgage. You can also include
associated bills in your calculations, such as insurance policies and other
regular commitments such as household bills. There are plenty of insurance
companies competing for this type of business, and this has driven premiums
down in recent years. It is advisable not to take the first policy offered.
There is no obligation to take the lender's own policy, and a bit of shopping
around can usually secure a more competitive premium.
Additional protection
Given the short period over which an ASU policy will pay out-usually one
year, and in a few cases, two years-this type of cover is only a short-term
solution. It is ideal if you are off work temporarily or need a few months
to find another job after being made redundant, but it is not a long-term
solution. If you become permanently disabled through illness or injury, you
need a more comprehensive answer. Insurance companies offer two types of
policy which can provide peace of mind by promising to ease your financial
worries in the event of your not being able to work through illness or injury.
Income replacement insurance
The first type of policy is income replacement insurance, which is occasionally
known as permanent health insurance. This provides a level of income for
as long as you are unable to work-until retirement if necessary. This money
can be vital in meeting your financial obligations because state help would
probably amount to less than £100 a week, even if you have a family.
Critical illness cover
The second type of policy is critical illness cover. This pays out a lump
sum (rather than providing an income) on diagnosis of one of a list of serious
illnesses or medical conditions-such as cancer or heart trouble-the sort
of long-term problems that might make you unable to work again for a lengthy
period, if ever. However, check the exclusions, such as Aids, which are common
in critical illness policies. You decide what to do with the money: you can
either spend some or all of it on paying off your mortgage, or you can invest
it and use the income to continue your regular mortgage payments.
Life insurance
It is worth considering what would happen if you died. How would those you
leave behind cope financially? If you have dependants and a major debt, such
as a mortgage, you should have a dedicated life assurance policy that will
provide funds to clear the debt. This is normally called term insurance,
and is relatively cheap. Note than many employers offer death-in-service
benefit of around three times salary, but your own circumstances will determine
if this is going to be sufficient to cover you over the life of the mortgage,
which might be 25 years. Many lenders will insist term cover is in place,
but if it is not you should consider it sooner rather than later. You get
no second chances here.
Getting the cover you need
The calculations regarding ASU can be fairly straightforward: total up all
your regular bills and get insurance for that amount. It is also possible
to insure yourself against redundancy only if your employer offers a generous
sick pay scheme. Income replacement and critical illness insurance is slightly
more complicated, because you are attempting to secure a long-term financial
solution embracing every aspect of your life.
There are a number of other complicating factors. For instance, you are not
allowed to insure yourself for replacement income that would see you better
off staying at home than going back to work. Critical illness cover is not
just about securing a lump sum to take care of your mortgage, you might need
to convert your property or take a holiday to convalesce. To make sure every
issue is addressed, you need to discuss your needs with an expert-preferably
an independent financial adviser-who can suggest a range of product solutions,
not just those of one company.
Costs
Like most forms of insurance, your individual circumstances and the amount
of cover you require will determine the premiums. Your age, health, sex and
occupation will be taken into account. Again, it is well worth shopping around
to find the best combination of cover and price, remembering that the cheapest
premium is not always the best option.
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Please note that articles on this site do not constitute regulated
financial advice, which recommends a course of action based upon the specifics
of your personal circumstances. The articles are intended to provide general
personal financial information. We urge you to consult an Independent Financial
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