Mortgage Protection
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Mortgage Protection
Rita Kohli explains your mortgage protection options.
What is mortgage protection insurance?
It’s terminology that’s quite new to the industry. It makes this easier to understand – in that this protection is linked to a mortgage. In a nutshell, though, mortgage protection is life insurance.
What are the different types of mortgage protection insurance available in the UK?
We’ll start with life insurance, which pays out a lump sum when you die. We would have a discussion with our clients about their mortgage and what would happen if they were to pass away – how would that impact their family or partner living in that property? Taking out a simple form of life insurance would mean that the mortgage is fully paid off.
Alongside that, you can have additional life insurance. This can make sense if you’ve got dependents relying on you – a young family for example, or a partner working part-time hours to look after younger children. You might even have older or adult dependents. It just depends on your scenario.
If financially they would be impacted by you passing away, you could set up additional life insurance alongside your mortgage protection.
You can also apply for critical illness cover. Statistically, there’s more chances of you claiming on critical illness insurance than life cover, thanks to medical advances and people living longer. But if you were diagnosed with one of the three major illnesses in the UK: cancer, stroke or heart attack, a lump sum would be paid out to you.
This doesn’t necessarily have to link to your mortgage, but you may decide on taking a certain amount of cover. It could pay off the mortgage or give you a lump sum to cover your salary. The aim is to protect your financial circumstances while you’re recovering.
Then there’s income protection. As the name suggests, this will protect your income up to a certain percentage. Again, it involves a detailed conversation. How much money are you putting towards the deposit to purchase a house or remortgage? How much of your salary covers household bills and your mortgage? What level of sick pay would you receive from work?
If you’re self-employed, you get nothing if you can’t work, so it’s an important conversation to have. If you were on long-term sick or had an injury due to an accident, this cover would give you a level of income until you recover.
Those are the main three elements, but there’s also family income benefit, which is a form of life insurance. Instead of a lump sum, family income benefit pays a monthly or yearly amount to a beneficiary. That could help them manage money better and pay the bills – rather than receive one huge amount.
It’s up to you – everything’s personal to your particular needs and circumstances.
What are the benefits of mortgage protection insurance, whether that’s life insurance, critical illness or income protection?
Having all of them is beneficial because it covers all the scenarios I’ve described. Certainly, having something is better than nothing. If you’re concerned that it might be too costly, we work with you.
We know what your mortgage is costing you and look at your other household bills to make sure you have enough money for protection. It will certainly benefit you if those unexpected events happen.
Do I need mortgage protection if I already have life insurance?
I would take a look at what you already have and work with that. I certainly wouldn’t ever recommend you replace or cancel your cover.
When you took out your original life insurance or critical illness policy, it would have been for a specific need at the time. But we all have life events and things change. We would look at whether that cover still makes sense based on your age and your circumstances now.
I’d certainly say you should have a regular review – to see if there are any gaps or if it’s sufficient, in which case you should absolutely keep it.
What factors should I consider when choosing a mortgage protection insurance policy?
It’s just as important as the mortgage, which keeps your roof over your head. Insurance means you can carry on paying that mortgage on a monthly basis, or clear it with a lump sum. It’ll help with the financial aspect of whatever happens.
Everybody has different life experiences. Perhaps a family member has been diagnosed with cancer and you’ve seen the consequences to their household’s finances. If you’re concerned it will cost too much, we can lower the benefit so that it works with you.
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Can I get mortgage protection insurance if I have a pre-existing medical condition?
It depends on what it is and how long you’ve had it. We would ask you about your medical history. We factor in any pre-existing medical conditions and we can call the providers for their view.
There are three potential outcomes – you get declined, you’re accepted, or they increase the premium slightly if you’re considered higher risk. It may also be referred, whereby they do some further medical reports on you.
You may need to see a private medical nurse that the provider pays for. Blood tests might be required, or a full GP’s report, which can take a few weeks to get. They’ll make an assessment based on the results.
Are there any exclusions or limitations to mortgage protection insurance policies to know about?
Exclusions are personal to your circumstances and your medical health. For example, with income protection, if you are diagnosed with depression, how long you could be off work can vary a lot. You may need counselling or medication.
A provider will take a view on whether this was pre-existing or whether it happened after you took out the policy. If it’s pre-existing, you may not be covered for that particular event. Or, you may be limited for how long it’ll pay for, or perhaps you receive a percentage of the payment instead of the full amount.
We would present any exclusions like this to you so you’re fully aware. You can then make an informed decision on whether to proceed.
How long does mortgage protection insurance coverage typically last?
It comes down to costs and preferences. You may want to specifically cover the time period of your mortgage. If you’ve got a 30-year mortgage, you might arrange insurance for 30 years – as you obviously don’t know when things could happen.
Or, you may decide you want mortgage protection for the mortgage term, plus additional family life insurance until your children turn 21 or 25. You choose how long it lasts for.
What happens if I can’t pay my mortgage due to unforeseen circumstances?
This is linked to income protection. We would ask you what would happen if you were signed off sick by your doctor for six months, for example. What does that look like? What savings do you have left once you’ve bought that house?
Who else could help you? Would your partner be able to continue working whilst you’re recovering? What happens to your income?
We would look at what your employer pays you, or if you’re self-employed, how long you can continue paying the bills before the bank account diminishes. Income protection is well worth a discussion.
What’s the cost of mortgage protection and how is it calculated?
It’s based on everything I’ve described… whether you’ve got pre-existing medical conditions, the size of your lump sum, how long you take it for and whether you want it beyond retirement age.
It’s all calculated and assessed differently by each insurance company. The main thing is that it depends on your age and your health. The younger and the healthier you are, the cheaper it is.
If you leave it till later in life, you’re more likely to have existing medical conditions, aches and pains to declare, which add to your cost. You’re actually better off being insured at a younger age because those premiums are guaranteed. They stay the same for the lifetime of your policy, unless you make any changes.
Is mortgage protection insurance mandatory in the UK?
No, you don’t have to take it out. However, the Financial Conduct Authority brought out a paper a few years ago called Consumer Duty. Under this, good advisors should be having that conversation with you.
As a client, you’re focusing on the mortgage and you might not be thinking about everything else that could happen. We make it mandatory to have the conversation at least, but it’s not a requirement with your mortgage.
Can mortgage protection insurance cover more than just the outstanding mortgage amount?
Absolutely. Everybody has different preferences and needs. Even a couple can have different opinions to each other. We make it as individual as it needs to be, prioritising what’s most important to you.
Can mortgage protection insurance help with other financial obligations besides the mortgage?
Not necessarily, but it’s there for the overall picture. If you were diagnosed with a critical illness or you were to die, there may be other financial obligations outside of the mortgage.
You might have credit cards or car loans to repay.
It’s really down to your personal circumstances and what the payout is. You can specifically design protection around your own health, family and mortgage.
What are the alternatives to mortgage protection insurance?
The alternatives are harder options – such as asking family to help you. But do you really want to do that?
Imagine you’ve got a young family and one parent is working part-time, but the full-time person is ill or injured. You’d have to make an important decision. Can the other parent go full time whilst the other is in recovery? How do you make up for the loss of income?
If it’s quite a severe illness that will take months, possibly years for recovery, you might not be able to go back to work in the way that you used to.
We recommend that you have six months worth of savings to cover your household bills. But everything keeps going up, and you might keep dipping into that savings account.
There aren’t many alternatives apart from selling your property and downsizing, which is not a practical thing to do when your situation is already under strain.
What else do we need to know about mortgage protection?
Don’t be afraid to think about this. When you were looking at mortgages, you’d have had lots of information. You’d have had many discussions with us and we guided you through it.
We’ll do exactly the same when it comes to protecting that mortgage. It’s important. You don’t have to make a decision there and then, you can think about it. We’ll do the research for you and come back with costs and exclusions.
You can make an informed decision, and we’ll continue to review that protection alongside your mortgage.
Key Takeaways:
- In a nutshell, mortgage protection is life insurance, and it is designed to make it easier to understand that the protection is linked to a mortgage.
- There are four main types of cover: life insurance (lump sum on death to clear the mortgage), critical illness cover (lump sum for major illnesses), income protection (protects income if you can’t work), and family income benefit (monthly or yearly payments instead of a lump sum).
- The cost is calculated based on factors such as pre-existing medical conditions, the lump sum size, and how long you take it for, but the main determinants are your age and health.
- Even if you already have life or critical illness insurance, a regular review is advised to check if your existing cover is still sufficient or if there are any gaps, especially as life circumstances change.
- Mortgage protection insurance is not mandatory in the UK, but advisers are required to have the conversation with clients as part of the Financial Conduct Authority’s Consumer Duty.
YOUR HOME IS AT RISK IF YOU FAIL TO KEEP UP PAYMENTS ON YOUR MORTGAGE OR ANY OTHER LOANS SECURED AGAINST IT.