Mortgage Protection
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Mortgage Protection
Adam Nunn and Jon Porter discuss mortgage protection and why this is crucial for homeowners.
What is mortgage protection insurance and how does it all work for anyone new to this?
Jon: Mortgage protection is a vital part of home ownership. It includes different insurance policies that help you keep your home, support your family and maintain your living standard, should the worst happen.
It often takes years to save for a deposit and gather everything you need to buy a property. But it can take just weeks or months, depending on individual circumstances, to lose that home. So it’s vital to have some sort of protection.
What are the different types of mortgage protection insurance available in the UK?
Adam: There are various types of protection, each serving a different purpose. The key ones to consider are:
- Income Protection: This replaces your lost earnings if you’re unable to work due to illness – essentially your own comprehensive sick pay.
- Life Insurance: Designed to pay out a lump sum of money if you die. It’s usually set up to clear the mortgage, although people do like to have additional sums of money as well – particularly when they’ve got a family to support.
- Family Income Benefit: Similar to income protection but paying out on death. This offers families a crucial income guarantee, ensuring that if they lose a parent or partner, they can still receive a monthly sum for a set period.
- Critical illness insurance: Similar to life insurance, this provides a lump sum payment that can be used to clear a mortgage if you’re diagnosed with a critical illness.
A key thing to note is that the last example refers to ‘critical illness’, not ‘terminal illness.’ With advancements in treatment, many individuals now survive critical illnesses. This type of protection typically sees providers insuring a set amount of illnesses. Standard policies are common, but enhanced options are also available, often including children’s critical illness cover.
Costs for critical illness cover can vary significantly across providers. Even with a stable income, it’s important to consider a number of things.
For example:
How stressful would it be maintaining your mortgage and other living costs whilst you’re suffering a life-changing medical condition?
Think about:
- How would that impact the family?
- Does your partner or spouse need to take time off work to look after you or the children?
- Do you need to make expensive adjustments to your home or even move home, due to your disability?
- Or do you just want that extra comfort blanket, so even if you have recovered from a critical illness, you have enough money in the bank to take that extended break when you need it most?
What are the benefits of having mortgage protection insurance?
Jon: Ultimately, mortgage protection insurance provides you with peace of mind. You’ll know that you can keep your home and provide for your family, maintain your quality of living, and cover any future lifestyle or living costs.
Homeowners often like to accumulate savings for expenses like replacing a car or boiler, holidays, family members’ weddings or education, or retirement. But if there’s something that’s going to affect you dramatically with regards to loss of income – due to illness or somebody passing away – mortgage protection is a way of covering those costs and still providing for your family.
For example:
I would like my son to go to university, but if I didn’t have my income it would be much more difficult, relying solely on my wife’s earnings. Having some form of income protection is crucial to ensure he can pursue higher education and even help him with a property in the future.
If you are not able to work, your pension contributions stop. With income protection, you can still contribute towards your pension pot if there’s the funds available to do so. That’s another area we can discuss with you, because it’s not just about covering the mortgage – it’s the personal side as well.
Do I need mortgage protection insurance if I already have life insurance?
Adam: Mortgage protection extends beyond typical life insurance. While life insurance covers one potential risk, we can help you identify other areas where you may be financially vulnerable. We’ll consider whether the existing life cover meets your needs and your family’s needs. If you need to make changes then, of course, we’ll make a recommendation for you.
What factors should I consider when choosing a mortgage protection insurance policy?
Jon: It’s important to understand your existing insurance coverage, which may include personal policies or benefits from your employment package. While an employment package offers coverage as part of the overall benefits, individual insurance provides you with greater control.
Another thing you should consider is your current health. If you have a clean bill of health hopefully this means a lower insurance cost; however, other factors, such as income and family medical history, can affect the type of insurance available.
The average person tends to be reactive when it comes to protection; for instance, once they’ve had a change in health, and had some time off work. Unfortunately, this will then become a pre-existing condition that could affect the insurance provider’s assessment of cover levels, and the cost of the insurance.
While you may not necessarily want to pay for it at the time, when it comes to the point of having a claim, that’s when having protection becomes a major benefit.
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Can I get some mortgage protection insurance if I have a pre-existing medical condition?
Adam: Potentially. It does depend on the type of insurance, the medical condition, and the level of risk it poses to the insurer.
Pre-existing medical conditions are usually excluded from policies, although that’s more so with income protection and critical illness rather than life insurance. Such conditions can also lead to increased premiums.
A pre-existing condition could lead to a postponement of cover, for instance, if you’re still under investigation. In the worst-case scenario, the condition might result in a decline for cover, as the individual is considered too high-risk.
Ultimately, the younger and healthier you are when setting up insurances, the more cost-effective they will be for the duration of the policy, and the better the insurance will be. If you can get what’s called ‘standard terms’ with no exclusions you are covered for all conditions included within the policy.
So, we’re going to take the time to understand your disclosures and the impact, so we can tailor our advice and present the cover available to you.
Are there any exclusions or limitations to mortgage protection insurance policies?
Jon: As previously mentioned, health exclusions can apply. Additionally, there may be activity exclusions if you do a high-risk hobby or compete in a professional sport.
It all depends on the type of insurance you take out. But there can be limitations with regards to the level cover that’s available to you. For example, personal income protection is designed to cover a high proportion of your gross earnings, but it’s not able to make you financially better off – you can’t insure yourself to be earning more money.
How long does mortgage protection insurance coverage typically last?
Adam: Mortgage protection insurance lasts for the duration of the policy. With some policies, you’ll have a set term, such as 30 years, whereas others will be set up based on age. Income protection, for example, would typically cover you until your state retirement age. You can cancel these policies whenever you want, usually without extra charges.
The benefit of this type of insurance, compared to something like car insurance, is that it’s typically set up as guaranteed and non-reviewable.
Unlike car insurance, where your premium is reviewed annually and can fluctuate, these insurances guarantee the premium from the point of offer. If it’s a guaranteed policy, the premium should remain unchanged for the entire duration of the policy, unless you choose to enhance the cover.
What happens if I can’t pay my mortgage due to unforeseen circumstances?
Jon: Ultimately, you risk having your property repossessed if you can’t pay your mortgage. Therefore, you should always inform your lender if you’re experiencing financial difficulties, as they will try to support you during any challenging period.
Some lenders may offer a temporary payment break or allow you to pay only the interest on your mortgage. However, this is still likely to negatively affect your credit file, potentially showing mortgage arrears. If there are no signs of recovery and you are unable to return to work and continue your mortgage payments, your property could be repossessed by the lender, resulting in the loss of your home.
What is the cost of mortgage protection insurance and how is it calculated?
Adam: There’s no set cost for insurance. Each policy is priced based on the level of risk, the probability of a claim, and the amount of coverage. Income protection and critical illness policies are more expensive, because the risk of needing time off work due to illness or experiencing a critical illness is higher than the risk of sudden death.
The cost of your cover is influenced by your personal profile, including your age, height, and weight. It also depends on whether you smoke, vape, or use other nicotine replacement products, as well as your occupation, medical history, and family history. Additionally, engaging in high-risk hobbies or pastimes can affect the cost.
Would you say something is better than nothing in this case when it comes to mortgage protection?
Adam: While there are various options, some may be more expensive. It’s important to remember that compromising on cost can also mean compromising on quality. That’s what we’re here for – to help you identify what you need and understand what’s available.
Is mortgage protection insurance mandatory in the UK?
Jon: The simple answer is no – lenders can no longer enforce mortgage protection. The only insurance that they can insist on, besides the mortgage conditions, is buildings insurance. Any other insurance is purely for common sense and peace of mind.
Can mortgage protection insurance cover more than just the outstanding mortgage amount?
Adam: Mortgage protection is a broad term. It’s all well and good protecting the mortgage, but if you as an individual or family lose an income, that’s going to have an even greater impact on your quality of living, regardless of whether the mortgage is cleared. That’s where other cover comes in – family income benefit, separate or additional life insurances, income protection and critical illness.
What are the alternatives to mortgage protection insurance?
Adam: It’s important to remember that insurance isn’t just for mortgages – it’s about protecting your living standards and expenses. If you’re working – whether you’re saving for a house deposit while living at home or renting – losing your income means losing your savings and wealth.
In the UK, people typically get protection advice as a mandatory part of the process when obtaining a mortgage. But people could, and should be, proactively seeking advice – even when they’ve not got a mortgage.
What we’ve discussed is personal insurances – you pay for them from your individual earnings to insure yourself. But for self-employed and limited companies, these types of insurance can also be set up via the business to protect you and your staff members.
Is there anything else you’d like to add?
Jon: Obviously, the sooner you take out insurance the better – that’s quite key.
While you could be lucky enough to be buying your first home in your 20s, the likelihood of you staying in that property for 30-35 years is fairly slim. You’re probably going to need a larger property due to family circumstances, or you might move due to a change in employment.
Insurance policies are designed to be flexible, covering lots of life events. You can change the cover level to meet your circumstances. If you do move and increase your mortgage, for example, you can increase your level of cover, subject to certain limits. It will affect the premiums, but it’s a much easier process to do that.
We would, of course, guide you through that process, and that’s why we always ask about your current cover – let’s see whether that’s a benefit to you and do a comparison.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.