Mortgage Protection

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Graham Sharkey from Status Mortgage Services joins the Mortgage & Protection Podcast to talk all about Mortgage Protection.

Why is Mortgage Protection so important?

Taking out a mortgage is likely to be the biggest financial commitment you’ll ever make. When we advise clients on buying, we look at the household income and agree on a budget that’s affordable and then we tailor the mortgage size and monthly payments to that budget. The lender grants the mortgage based on the applicant’s ability to maintain the payments for the duration of the mortgage.

It’s so important that we can rely on that income to be there for the duration of the mortgage, no matter what happens along the way. People’s income positions can change over time, sometimes for the better but also for the worse, and for a number of reasons which could jeopardise the ability to pay that mortgage and financially provide for their family.

As your adviser we don’t just have an obligation to secure your mortgage, we are also obliged to ensure we recommend suitable protection insurance that runs alongside that mortgage so you and your family can stay in that home in the event of unfortunate circumstances, accidents and injuries.

People do sometimes unfortunately fall ill, preventing them from being able to earn a living in the short or even the long term. Sadly people can also prematurely die, and the financial impact this has on families can be devastating. If you’re properly insured and protected, we can’t stop these events from happening, but we can fully protect you and your family against the financial impact and avoid any further distress or heartache at an already difficult time.

What about mortgages that have been completed without protection?

There are situations where people decline the advice or don’t take out that protection. If you have people that rely on you financially, you must have adequate protection in place, it’s not a question of should you take it, it should definitely be in place.

Anyone that doesn’t have any or isn’t sure whether they’ve got the right level of cover, they should be asking themselves if their family could cope financially if either you or your partner died. You need to know the answers to that. If, for whatever reason, clients haven’t taken out insurances, or have existing policies in place that have a shortfall and subsequently they are unable to maintain mortgage payments, the lender will eventually repossess the property leaving you and your family potentially homeless. This can have a devastating impact, not to mention that it could be happening at a time when you’ve lost a loved one or you’re trying to recover from an illness.

Research has shown that 1 in 2 people born after 1960 will be diagnosed with cancer in their lifetime and the average UK household could only survive on their savings for approximately twenty four days, which really highlights why people should be insuring themselves.

The common misconception is that people don’t realise how affordable it can be. It will never be cheaper than taking it out now, because the older you get, the more expensive it becomes and in most circumstances, the premiums can be fixed for the life of the plan so you can guarantee what you’re paying.

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Why do we need life insurance?

Life Insurance can be defined as a contract between the insurance policyholder and an insurance company, where the insurer promises to pay a sum of money in exchange for a premium, upon the death of the insured person within the term of the contract. If the insured person dies, depending on how the plan is set up, it can pay a lump sum or a monthly sum.

The reason people need it is to avoid the financial hardship that your dependents would experience in the event that you died. It’s such an important policy to have, and one of the cheapest to put in place compared with some of the others.

Do I need Critical Illness Cover and how does it differ from Life Insurance?

Given the statistics that potentially one in two people are likely to experience some form of cancer in their lifetime, insuring against that event is certainly sensible. Claims to this type of policy are more likely, the cost can be much more than a basic Life Insurance policy. It’s a very worthwhile policy to have if you were diagnosed with a critical illness as it can support you financially whilst you’re trying to get better or you’re undergoing the relevant treatment, as it’s unlikely you could work during that period.

A Critical Illness policy pays a tax-free lump sum, which you could use to pay your mortgage or ease your financial concerns, which means you could just concentrate on getting better without the additional financial stress that you could be experiencing with no cover in place.

Paying premiums for Life Insurance doesn’t really benefit you if you have nobody to leave behind, whereas in contrast, Critical Illness is completely different in that it’s designed to help you if you suffer. The claim is made at the point of diagnosis, so a successful claim would be paid immediately and the claim is not linked with mortality.

Hopefully you recover from the critical illness and you don’t have to give that money back, but it will help you during that period. Critical Illness is a much more complex policy than Life Insurance. The quality of the policies can vary immensely from provider to provider. The cheapest is not necessarily the best if it covers you for less conditions than a more expensive, more comprehensive policy. An advisor can really add value in ensuring you take the right policy.

What is Income Protection?

Income protection is a long-term insurance policy that makes sure you get a regular income for a set period of time, usually until you retire, are able to return to work, or however long the policy’s been set up for.

It differs from critical illness in that you don’t need to be critically ill to claim, you just need to be unable to work, so it will replace lost income. Your adviser looks at any existing sources of protection against loss of income, things like sick pay, savings, or any other income to the household, and then we’d recommend the policy to fill in any shortfall.

We can also look at having it structured, whereby the policy starts after a deferred period, which helps keep the cost of the premium down. An example would be an employed person who receives six months full sick pay, the policy could start paying after you’ve been unable to work for six months, so that’s less risk for the insurers, as they know that statistically people recover from a large percentage of illnesses within six months.

It works quite well alongside a Critical Illness policy, because if something very bad happens, there’s a lump sum that may clear the mortgage, whereas Income Protection would not only pay out if a critical illness were diagnosed but it can also help in less serious illness scenarios or if you suffer an accident and injury.

Can you combine policies?

Absolutely. In fact, that’s exactly what we’d recommend when we say protection package. All of these policies are beneficial in their own right, but we would look to recommend a protection package that included a combination of these policies to cover every eventuality.

An example of a full protection package for a couple with children could typically be a combined Life and Critical Illness policy, which would pay off the mortgage if either of them die prematurely or are diagnosed with a critical illness. Joining the two policies together can save money.

In addition, we’d recommend both applicants have income protection policies to replace their incomes if they’re both bringing an income to the household. Lastly I’d probably recommend another joint life policy that paid a monthly amount until the children reached a certain age in event either partner died, because a Life Insurance policy could pay off your mortgage, but don’t forget we’ve also lost that person’s income to the house so we want to replace that too. We call that style of policy “Family Income Benefit.”

How much should I budget for Mortgage Protection?

How much to budget is an impossible question to answer generically, because every client’s circumstances are different. Some clients need more cover than others and age plays a big part in the cost, the younger you are, the cheaper the cover is to take out. I always suggest clients allocate as much as they can afford to this area, because it is really important.

People shouldn’t assume it’s not going to happen to them, and try to accept your advisors full recommendation. If this feels too expensive, the client can stipulate a budget and we can trim back a package to a client’s preferred budget. Some cover is always better than no cover.

Some providers are now actively incentivizing you to become more healthy in the hope you’ll live longer and stay fit and they won’t have to pay some of the benefits. You can expect to get additional benefits with some plans like discounted gym memberships, nutritional support, private GP appointments via video link free with the plan. Insurance companies are constantly evolving and, as a Mortgage Broker, we can compare the policies accurately and recommend the right provider for your circumstances.

We’re also a friendly point of contact for the future and if circumstances change or you need reminding of what your cover includes. There’s no cost for us to review your existing cover or recommend a new package. We won’t recommend anything we don’t have ourselves, and all our advisers in the practice have these policies to protect our own family’s financial security.

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