Purchasing a house is one of the biggest financial transactions you will make in your life. Taking out a mortgage to facilitate the purchase adds to the level of importance because you now have a significant debt to your name. This is not designed to scare you, but to educate on the other considerations when entering into a mortgage contract.
What is mortgage life insurance?
The first consideration is insurance. There are many different kinds of insurance that become relevant once you take out a mortgage. Let’s explore these one by one in more detail.
Life insurance
This is fairly self-explanatory. Life insurance insures your life, so if you pass away, the policy pays out and subsequently ends. There are many different types of life insurance with varying characteristics. Most policies have a fixed term that they are valid for, whilst some cover you for the rest of your life. Some have a sum assured (the amount paid out if you die) that is fixed, and others increase or decrease over time.
What is the difference between life assurance and mortgage protection?
Mortgage Protection is one type of life assurance. The type of life insurance most relevant to a mortgage is called decreasing term assurance. ‘Decreasing’ because the sum assured decreases over time as the amount owed for the mortgage decreases, and ‘term’ because it has a fixed term that matches the term of the mortgage. This, of course, is only relevant to repayment mortgages. Having this is vitally important because if you die during your mortgage term, your debt will pass on to your loved ones and could put them in financial difficulty. With the life insurance, your mortgage is paid off with the proceeds from the policy.
Another very sensible option with life insurance is to write the policy in trust. This means that the policy is removed from any complications with the estate upon death and can be paid to your beneficiaries quicker, allowing them to pay off the mortgage sooner.
There are many factors that would affect the type of insurance you get and how much you should be insured for. This depends on your financial situation and any dependents you may have. We would conduct a full review of your financial protection needs and recommended the most suitable policy.
Do you need life insurance for a mortgage?
There is no requirement to take out life insurance but this is highly recommended. For young, healthy individuals the cost will not be very high and this can provide huge benefits if the worst were to happen.
What other types of insurance should I consider?
Building and Contents Insurance (Home Insurance)
Now that you own or will be owning a house, it is vital to insure it in case of damage and also the contents in case of damage or theft. This insurance will be your saving grace if there were to be a catastrophic event such as a fire or flooding, or if someone were to break into your house and steal your belongings.
Policies are not overly expensive depending on the value of the house but make sure you are clear about what your policy covers before taking it out. We do not provide this type of insurance but can point you in the right direction.
Income Protection
Whilst not directly linked to a new mortgage, income protection becomes even more important once you have taken out a mortgage. This type of policy will replace a proportion of your income should you be unable to work due to illness or injury. Whilst not paying 100% of your salary, it will pay in the region of 60% depending on the specific policy. The payments continue until you are able to return to work or retire.
This provides peace of mind that you can maintain your livelihood if something happens and you are unable to work. You can continue to make your mortgage repayments and pay necessary bills. It is a common misconception that the Government will support you should you suffer a life changing injury or illness. This is not the case, and statutory sick pay will only last for 28 weeks. It is worth checking with your employer if they have company-specific sick pay. Your policy can be tailored to your situation so that it commences income once any other sick payments have finished.
Pre-existing medical conditions will likely be excluded under these policies, and they could possibly look at your family medical history to add more exclusions. All of these would be clear in the policy documentation.
We can look at your financial situation and recommend a suitable policy for you based on this.
Mortgage Payment Protection Insurance
This type of policy will cover your monthly mortgage repayments should you be unable to work due to illness, injury or unemployment. There are varying levels of cover which will insure you against some or all of these reasons for being unable to work. Compared to income protection,this is a short-term solution as most policies only pay out for 12 months.
There will also be a waiting period before the payments start, and the smaller the waiting period, the more expensive the policy. Providers often set a maximum monthly payout of around £1,500 to £2,000, but you do get a choice of how much you would like the policy to pay and you may decide to have more cover so that your bills are covered as well as your mortgage repayments.
This is another policy that we could source for you based on your specific situation.
Critical Illness Cover
Critical Illness Cover pays a lump sum if you are diagnosed with a serious medical condition. Each policy has a list of conditions that are covered, and all benefits are paid tax-free. The idea behind this cover is to provide a cash injection during a time of need so that you could, for example, adapt your home to suit the needs of your new condition or pay off the remaining debt on your mortgage.
Conditions that are covered include those serious illnesses that are life threatening. This depends on the policy so make sure to read the information carefully. Each policy includes a survival period, which is the amount of time before the policy pays out the lump sum.
We will assist you with finding the correct plan for you after finding out about your requirements.
Other considerations
Now that we have covered the main types of insurance that you may need, lets look at the other legal documents that you should consider.
Wills
In an ideal world you will already have a Will written. You can read more about them here. If you have an existing one, then this should be amended to include your new property. If you do not have one yet, then owning a property is a significant enough asset that you should write a Will. This will ensure that the property is passed to the correct beneficiaries if something should happen to you.
We do have a Will writing service, which involves us finding out your wishes and drafting the Will for you. There is a fixed fee for doing this which varies depending on the complexity of the Will.
Lasting Power of Attorney (LPA)
A Lasting Power of Attorney is a document that gives someone else the power to make significant decisions on your behalf if you become unable to do so yourself. If you have an accident or suffer a serious illness and no longer have the mental capacity to make decisions, then your nominated person or people have the ability to make these decisions for you.
There are two types – Health and Welfare, and Property and Affairs. You can read more about LPAs here.
Our LPA service is straightforward and fast. Get in touch with us for more details if you are interested.
Conclusion
In summary, there are many considerations when purchasing a property except for just the mortgage. You have entered into a significant financial contract including large amounts of debt so you require some protection in case the worst should happen. Planning for these events is not in the forefront of people’s minds because thinking about death or illness does not come naturally to us. However, these are the kind of matters that you are extremely grateful for in the event of an unexpected issue.
