Protecting your payments

None of us like to imagine missing mortgage repayments, but it is important to have plans in place just in case. Pauline McCallion explains why

It’s only natural that you want to protect your home – that’s why you make sure it’s safe and secure, ask neighbours or friends to keep an eye on things when you’re on holidays and perhaps even invest in security lights and burglar alarms. It’s all well and good protecting your home from the threat of intruders, but what about the threat of missed mortgage repayments? How long could you survive for if your income was to stop suddenly? How would you pay your mortgage, as well as all your other bills? If you have dependents, would you to be able to support them as well?

Types of insurance

In such circumstances insurance could well be a lifeline. You can use it to cover your income or your mortgage repayments and/or other outgoings should you have an accident, become ill or unemployed. Policies commonly in such circumstances include: (mortgage) payment protection insurance (effectively the same as accident, sickness and unemployment (ASU) cover), income protection and critical illness cover.

Another option is life insurance, which will provide a lump sum for your dependants if you pass away. You can take out either or both, depending on what you feel you need. And it’s not compulsory to take out this kind of insurance either, but it could provide peace of mind, especially given the current economic climate in the UK. Simon Chalk, mortgage planner at Mortgage Portfolio Services, says: “During an economic downturn, people often feel less secure and tend to look for protection. If you already have a mortgage, it’s not too late to get cover now, but it’s really something you should think about when you take out your homeloan.”

Getting the right cover

But with a multitude of options on offer, how do you find the right policy? While rate is obviously an important consideration, you should also look at what exactly the policy actually covers. Chalk says: “Consider what you already have. Look at your job contract or talk to human resources about what you will receive, and under what circumstances. You need to work out how much you would get paid by your employer if you couldn’t work – usually half of your normal salary – and for how long – typically six months.” Arrange your policy so that any cover kicks in after that, otherwise you’re only paying for insurance you don’t need.

Prioritising the risks to your income will also ensure you don’t end up paying for more than you need, according to Chalk. “It is often too expensive to insure against everything, so you need to work out what is the biggest risk to your income,” he explains. For example, if you got made redundant, would it be difficult to find another job at your level, in your industry? Or perhaps a specific type of illness or accident could prevent your from carrying out your normal job – this would be a top priority in terms of working out what cover you need.

Finally, you should regularly review your policy to make sure it fits with your current needs. Your present employer may offer top-notch benefits, but what if you change jobs? Michelle Moran, mortgage adviser at brokerage Plan Invest Group, says: “If you move jobs, your current level of cover might not be sufficient for the new level of employee benefits, or your health might have deteriorated in the meantime.” Chalk adds: “Review your insurance whenever there are any changes to your circumstances. A typical trigger is remortgaging, but changing jobs, moving in with a new partner, having a baby or getting a divorce could also mean it’s time for a rethink.”

Exploring your options

Many mortgage lenders will offer some form of protection when you take out a loan with them, but remember you don’t have to take this cover. You are free to shop around and buy from another lender, insurer, bank or building society. A recent report from the Competition Commission estimated borrowers could be overcharged by up to £1.4bn per year when it comes to payment protection insurance (PPI). This may be because consumers often accept a policy offered alongside a loan, rather than shopping around for separate – and possibly more cost-effective – cover. Matt Morris, policy adviser at protection specialist LifeSearch, said: “People have these policies pushed on them when taking out loans, without any real idea of the alternatives out there. Banks and mortgage lenders make a fortune out of selling PPI. It is certainly quick and easy to sell but it offers consumers a relatively poor level of cover compared to other policies on the market.

“PPI is laced with exclusions and usually only runs for one to two years. Alternatively a product such as income protection offers better value for money, pays out for longer and is often cheaper too. If consumers knew the full details, very few would opt for PPI.”

However, that’s not to say that you should completely ignore what your lender has to offer – weigh up all the options available to find the right deal at the right price for your circumstances. Moran adds: “Cheaper is not necessarily better, go for value for money.”

Researching your insurance options probably won’t be the most thrilling activity you will ever undertake, but finding the right policy could be a cost-effective way of protecting your income, your home and your family.