Purchasing a house is one of the most significant financial transactions you will make. Taking out a mortgage to facilitate the purchase is important because you now have a considerable debt to your name. This is not designed to scare you but to educate you on the other considerations when entering into a mortgage contract.
What is mortgage life insurance?
The first consideration is insurance. Many different kinds of insurance 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 for which they are valid, 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 reduces over time as the amount owed for the mortgage decreases, and ‘term’ because it has a fixed term that matches the mortgage’s term. 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 upon death, the policy is removed from any complications with the estate and can be paid to your beneficiaries quicker, allowing them to pay off the mortgage sooner.
Many factors 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 will conduct a full review of your financial protection needs and recommend the most suitable policy.
Do you need life insurance for a mortgage?
There is no requirement to take out life insurance, but it 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 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 critical once you remove a mortgage. This 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 can return to work or retire.
This provides peace of mind, and you can maintain your livelihood if something happens and you cannot 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; 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 to commence 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.
Based on this, we can look at your financial situation and recommend a suitable policy for you.
Mortgage Payment Protection Insurance
This policy will cover your monthly mortgage repayments if you cannot work due to illness, injury or unemployment. There are varying levels of coverage that will insure you against some or all of these reasons for being unable to work. This is a short-term solution compared to income protection as most policies only pay out for 12 months.
There will also be a waiting period before the payments start, and the shorter 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 and mortgage repayments are covered.
We could source this policy 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 covered conditions, 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 serious, life-threatening illnesses. This depends on the policy, so make sure to read the information carefully. Each policy includes a survival period, which is the time before the lump sum is paid out.
We will assist you with finding the correct plan after discovering your requirements.
Other considerations
Now that we have covered the main types of insurance that you may need, let’s 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, this should be amended to include your new property. If you do not have one yet, owning a property is a significant enough asset to write a Will. This will ensure that the property is passed to the correct beneficiaries if something should happen to you.
We have a Will writing service, which involves 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 cannot do so yourself. If you have an accident or suffer a severe illness and no longer have the mental capacity to make decisions, then your nominated person or people can 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. If you are interested, contact us for more details.
Conclusion
In summary, there are many considerations when purchasing a property, besides 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 at the forefront of people’s minds because thinking about death or illness does not come naturally to us. However, these are the kinds of matters that you are incredibly grateful for in the event of an unexpected issue.
