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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.


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 Adviser (IFA) before making any important decisions about your finances. Call 0800 085 3250 for details of IFAs in your local area. Any statement regarding financial services products and tax liability is based on legislation and tax practices as at 1 January 2004, which is, of course, subject to change.The value of any tax benefits or reliefs depends upon the individual circumstances of the investor.When investment performance is mentioned you should remember that past performance is no guarantee of future performance. Where products have an underlying investment content, in many cases the value of the investment can fall as well as rise. For with-profit based investments, there is no guarantee as to the level of bonuses that will be declared, if any. Where mortgages or secured loans are explained do remember that your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it. All mortgages are subject to underwriting, status and are not available to people under the age of 18.

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Schedule of Articles

property investing
property refurbishment
buying overseas property
moving house
home letting
buy to let
home improvements

top 10 celebrity areas
6 up & comming areas
5 signs that an area is up & comming
city types yearn for the country in town
your place in the sun
equity release
planning permissions & extensions
estate agents
rent or buy
buy to let
mortgage overpayment
mortgage endowments
mortgage protection
stamp duty
self build your home
electrical surveys
the cost of moving in
the perfect neighbourhood
council tax
house price league
good neighbours
stamp duty land tax
top 20 towns 2003
cut the cost of moving
interest rates
buying in scotland
dream homes
first time buyers
the worth of uk homes
bad estate agents
keeping up appearances
home improvements


Please note that articles on this site & any other 'planning-approval' related web site does not constitute professional advice. All articles are intended to provide a general view of many subjects. We suggest you to consult a solicitor before making any important decisions.  The author is not an expert in any given field.

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