Daniel Deering and Mark Lee, Mortgage and Protection Advisers from Yellow Brick Mortgages discuss the importance of mortgage protection and the different options available.
Why is mortgage protection so important?
Mortgage protection is one of the most important parts of the whole homebuyer process. It’s a way to protect you and your home, to make sure that the house you’ve fallen in love with, and spent so much money on is protected, should the worst happen.
You’ve always got peace of mind that if an accident occurs or you lost a partner or one of you has a serious illness and becomes unable to work. Mortgage protection is designed so that you don’t have to worry about the house or your finances in these circumstances. It allows you time to focus on more important issues, like recovering and getting well again.
It’s also important to make sure that it’s set up in the correct way so that you’ll get the most out of it. It’s often overlooked by clients when the main focus is getting the mortgage and the house, but it’s important to ensure that once you’ve got that house, you can afford to stay there if the worst happens.
What would happen if somebody didn’t take mortgage protection?
The worst case scenario would ultimately be that, if they couldn’t afford to pay their mortgage, the lender would repossess the house. If the main income earner is unable to work or dies, then it puts a lot of undue pressure on the remaining person, especially if they have a really high mortgage or have children.
Why do we need life insurance?
Life insurance is really important in securing peace of mind that, if anything happens to you, your loved ones are taken care of. It’s a simple tool and a really simple policy that is designed to protect your family financially, after you die.
Nobody likes thinking about bad things happening, but life has a way of throwing up circumstances we’re not prepared for and life insurance is something everyone should consider. It is usually the cheapest option out of the different covers available, because statistically it’s the least likely event to happen during the period of your mortgage term.
Do I need critical illness cover and how does this differ to life insurance?
Critical illness policies payout whilst you’re still alive. Each provider will have different definitions of what a critical illness is, what is covered and how severe they need to be to pay out on their policy. But in general, a critical illness policy will pay you a tax free lump sum on diagnosis of one of the critical illnesses within the policy definitions, for example, cancer, heart attack or stroke, amongst many others.
It allows you to have some financial support if you develop a critical illness and need to take some time off work. Depending on the illness, you might need help with bills or specialist care or you might need to adapt your home. Critical illness cover provides a pot of money to give you security to be able to make your own decisions rather than worrying about rushing back into work and potentially putting further strain on your health.
An important thing about critical illness cover is that the cheapest is not always the best. We’re in a society where everyone wants everything as cheap as possible, but with insurance, the better providers will charge you more.
Ultimately, it’s better to take less cover than an inferior quality policy, because a policy that will pay you a million pounds is useless if they are so restrictive that they are unlikely to pay out. It’s more beneficial to have a smaller, but definitive payout. If you’ve got a set budget in mind for your insurance cover, then we can design and tailor a protection policy to fit in with your life.
What is income protection?
Income protection is a policy designed to provide a lump sum each month to replace part of your income. Unlike life and critical illness covers, where if you were to be diagnosed or have a claim made or not, you would receive a much larger lump sum, income protection is designed to pay a portion of your monthly salary.
There are different options available and depending on the level of cover, the income protection payout could last for anywhere from a year to two years from the point of claim. Some income protection policies will actually pay right through to your retirement age.
With income protection, the monthly payout needs to be in line with what you actually earn because an income protection policy tends to cover 60- 70% of your annual salary. It’s also important to realise that they won’t pay out while you’re receiving any cover from your employer. So if you get three months full pay from work in the event of illness of injury, you would set an income protection to start after three months, so that there are no gaps in income.
What is family income benefit?
Family income benefit ties in with life insurance as it’s basically a life insurance policy that’s paid out incrementally over months or years, as opposed to one big lump sum. They are aimed towards families and protection is usually set in line with children’s ages. For example, if you’ve got a one year old, you might take a 20 year policy to insure that the remaining spouse would have an income until your children are twenty one, if you pass in their lifetime.
Can you combine policies?
Yes, and it’s a really beneficial part of protection policies, because you can tailor them to fit your needs. You can have income protection with critical illness and life insurance. You can have just life and critical illness and you can really have any combination you would want.
What about planning for inheritance tax?
We aren’t qualified to give specialist tax advice, so always speak to either an independent financial adviser or an accountant about this subject. In general, the main ways that protection policies and inheritance tax interact are in regards to trusts. This is especially important for couples that aren’t married as if one of you were to pass away without a will, that policy might not necessarily go to one another.
If you don’t have a will, then the rules of intestacy will apply and a trust is designed to ensure that the money from the life insurance policy or any of the other policies are paid to the right person and the right time.
Probate is where a will is actioned by a solicitor after someone dies, which can take multiple months. Having a trust put in place takes the proceeds of that policy outside the client’s estate for inheritance tax purposes so it can be paid without probate needing to be settled and it can be paid much quicker. If the policy itself is large, but you didn’t have a trust in place, it would naturally pay into the estate and you could then potentially have an inheritance tax liability bill. By having a trust in place it doesn’t fall subject to inheritance tax.
You can put policies in place like a whole of life policy, which is designed to pay out upon death to settle any inheritance tax bill.
How much should I budget?
Whatever you can afford on a monthly basis. Each client’s income and expenditure is going to be completely different. Some will be able to afford more cover and others won’t be able to afford cover for everything. What’s really important is gauging what’s the most important level of cover for each individual.
It’s difficult to put an exact figure on how much you should budget, but as Mortgage Brokers, we will present different quotes offering different levels of cover, so that it remains affordable. Smokers have naturally higher premiums and ultimately someone with a larger mortgage should expect to budget more, as there is a bigger debt that needs to be protected. Budgeting between 5-10% percent of your monthly mortgage payment is probably a realistic amount to get an adequate level of cover.
What is business protection?
There are two main policies that could be taken out by a Limited Company Director. Relevant life insurance is usually used to protect the shares owned by a person, especially if you’re in partnership with another individual. This would pay out a lump sum to the business to ensure that the family of the person that’s passed away can be remunerated from the business for their shares so that the shares don’t fall to the family to then get passed away.
The other one is key person insurance, which is if you have an especially valuable worker that would be very hard to replace, you can take out a life policy that would pay out on their death to the business to help cover the costs of recruitment or training.
How can YBM help?
Many people believe that if they pay for cover, at the point of claim, insurance companies wouldn’t pay out. It’s important to be fully transparent with us or any adviser when arranging any form of protection policy, because if there is any missed declaration in terms of the medical questions that are given to the provider, then there is a chance that they could not pay out. If you have a legitimate claim and you are fully covered, then there’s no reason why they wouldn’t pay out.
When you speak to us here at YBM, we will only ever recommend a cover we believe is of a good enough quality to warrant paying for. On our website, there’s an about us page with all the team members or where you can contact us individually or you can give us a call on the central line.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.