How to protect you and yours
Your home is more than your biggest expense, it’s the place where you and your family feel safe and secure, and it’s important to protect it.
Insuring the fabric of your home with buildings cover is essential if you have a mortgage, and most people cover their belongings with a linked contents policy.
But what about covering your ability to repay your mortgage?
There are many reasons why you might not be able to meet your mortgage repayments from death to redundancy, and it pays to be prepared.
However, only half (50%) of the UK’s mortgage holders have taken out life assurance, and even fewer (20%) have critical illness cover, according to research from Scottish Widows.
There are different types of life insurance, from very straightforward policies to more complex arrangements.
The cheapest type of life cover is called term assurance, and it lasts for a set term, usually your mortgage term.
You protect an agreed sum, typically your mortgage borrowing, and with the cheapest policies the cover reduces alongside the mortgage debt. So if you die at any point during the term the policy will cover your mortgage.
To cover a £130,000 mortgage a single person aged 30 would pay £5.78 and a couple £10.80 a month, with Scottish Widows.
Term assurance policies have no cash-in value, so you don’t get anything back if you don’t need the policy, as with a car insurance policy.
Alternatively, some life insurance schemes roll up an investment with an insurance policy, so that over the years you are not only covered in case of death but you are also building a redeemable sum of money for the future.
These are more complicated and require financial advice, but they can be a good option for those who can afford to pay a higher premium.
It’s clear why life insurance comes highly recommended to borrowers with dependants, but what about critical illness cover?
This insurance covers an agreed amount payable as a tax-free sum if you are diagnosed with one of a list of diseases noted on your policy.
And it could be well worth considering.
Johnny Timpson, protection specialist at Scottish Widows, explains: “Statistically, those of working age are far more likely to lose the ability to work and earn following an accident, illness or disability than die from it, so a sensible step is to consider an appropriate strategy to clear/reduce your outstanding mortgage debt and maintain your level of income. It’s worth discussing the benefits of critical illness and/or income protection insurance cover with your adviser.”
Emma Thomson, head of customer care, LifeSearch, added: “Anyone with debts or with family members who are reliant upon their earnings should consider financial protection against ill health. Most people typically consider life insurance and other types of cover when buying a house or getting married. But there are other situations as well such as going self-employed or starting a family. Life cover is usually the least expensive option, but that’s because we are all more likely to be ill during our working lifetime than popping our clogs.”
Before you assess what life cover and critical illness protection you need it’s worth taking into account any workplace protection you might already have in place, along with your savings and investments.
Protect your payments
You can also protect your monthly mortgage repayments in case you are unable to work. This could be because you are made redundant, or suffer an accident or illness. Any of these circumstances could last from a month or two to many years.
According to the TUC in September one in eight people are forced to stop working before they are eligible for the state pension due to poor health.
But there are insurance policies that can adequately cover you in case you can’t meet your repayments. After all, if you are going through a difficult time with your health or your job, worrying about the roof over your head is the last thing you need.
A mortgage payment protection policy usually covers your mortgage for one or two years if you can’t pay it because of accident, sickness or unemployment. Premiums are reasonably low – around £5 for every £100 of mortgage repayments. The idea is that you will hopefully be better or have found other work within one or two years.
Alternatively, an income protection policy can be arranged to cover your mortgage payments, or any agreed sum, until you are able to return to work, or until you would have retired. These policies are clearly more expensive and premiums depend on your personal circumstances, but they can prove invaluable.
Relying on the State is no longer a viable option for many families, with significant changes to Support for Mortgage Interest (SMI) meaning that help will be provided as a loan in the future.
Timpson warns: “Many people believe that they’ll be able to rely on the State if the unforeseen happens, but recent cuts to welfare benefits are exacerbating their vulnerability.
“Having a financial plan in place will help protect your home in this type of eventuality and give greater peace of mind when it comes to what may be your greatest financial investment.”
Mary Wells, a housewife from Dorset, is in her thirties. She and her husband, the director of a roofing company, recently reviewed their insurance to ensure their family was fully protected.
They have two children, one in school and the other in preschool and still have around 20 years left to pay on their £150,000 mortgage.
The couple already had a life insurance policy in place but decided they needed to get more comprehensive cover.
Mary explains: “A close friend was diagnosed with terminal cancer and it really made us realise that we needed to ensure our children’s futures were secured and that the remaining parent is able to support the family and bring the kids up with less worry.”
After taking advice they decided to cover their remaining mortgage with a new policy from Scottish Widows, plus added in Critical Illness Cover and monthly payments for both of them if they are unable to work.
The new policy costs around £80 and runs for 25 years, covering them both, covering them both for death, illness and accidents so if they can’t work child care is covered monthly, and the remaining parent can still work and support the family.
Mary says: “The policy we were sold with the mortgage wasn’t worth the paper it was written on. We took it out when it was just myself and my husband and it wasn’t a concern, just a requirement for the mortgage.
“The new cover is worth every penny just for the price of mind it brings to know our children would be well provided for.”