You’ve found the house of your dreams, planned your décor, eager to move in. Or maybe you’ve remortgaged to release some equity for an investment. Either way, the last thing on your mind is what would happen to your home if something happened to you.
To provide financial security for your loved ones, the first consideration has to be your mortgage and how it would be covered in the event of your death.
Whether one partner is earning and the other isn’t, or both contribute towards the mortgage, without your regular household income, meeting monthly mortgage payments could prove impossible. In fact, it could force your loved ones into a financial crisis, during an emotionally difficult time.
There are easy ways to prevent this from happening. Consider these options if you have a joint mortgage or dependants that you will leave behind.
What is decreasing-term life insurance?
A decreasing-term life insurance policy lasts for a pre-agreed number of years, matching the length of your mortgage, and pays out if you die during that time. Each year, the pay-out decreases alongside your mortgage debt decreasing.
While it doesn’t cover any costs or bills outside of a mortgage, clearing a mortgage has a hugely positive impact on finances, and ideal for those with working partners or dependents who are able to continue to pay household bills. This means that this type of life insurance policy is cheaper than a level-term insurance policy.
What is level-term life insurance?
If you’d like your family to be mortgage free and have a lump-sum to cover future expenses such as education, holidays or even the basics like food, utility bills and running a car, consider a level-term life insurance policy.
As your mortgage debt reduces over the years, your insurance payout amount will remain the same, or ‘level’. This type of policy is designed to pay off your mortgage, and leave a gradual surplus amount to protect your family against funeral expenses. This cover can be around 25% more expensive than decreasing term assurance but is the best type of cover if you have a current or flexible mortgage type, where your debts can flex both and down.
What is whole-of-life insurance?
For those looking for protection for their loved ones, no matter when they die, a whole-of-life insurance policy may be the way forward. As it says, it covers you for the rest of your life.
This type of life insurance policy is typically more expensive than those that cover a fixed period of time, but can be used to cover a funeral, or for inheritance tax planning.
What does ‘death-in-service’ insurance cover?
You may already have life insurance provided through your employer. This is typically a simple death-in-service policy providing a single pay-out of four times your salary on your death. Check all your employee benefits and consider whether four times your salary would be enough to cover your remaining mortgage.
Also consider whether it is worth having a ‘back up’ should you lose your job, given these tumultuous times. If you do have death-in-service at work, it could mean that any additional policy you take out can be reduced and your premium will be lower, so it is certainly worth discussing this with a broker and ascertaining how this can work alongside your mortgage.
What is critical illness cover?
If you have critical illness cover, and you are diagnosed with a specific, serious illness listed under the policy, you will receive a pay-out while you are still alive, which you can use to meet mortgage repayments and other financial responsibilities.
Most insurance policies cover around 40 critical illnesses, and these will include things such as cancer, heart attack, Parkinson’s, and stroke.
It’s worth considering your family’s medical history and assessing the likelihood of contracting a serious illness. However, statistically speaking, the risk of anyone suffering a critical illness, rather than dying during the length of their mortgage, is much higher. Therefore, the costs of critical illness policies are greater.
You can reduce the premiums by incorporating critical illness cover into your mortgage life insurance policy. Critical illness is a more costly option, but it is worth exploring.
What does accident and sickness insurance cover?
Accident and sickness insurance can protect your monthly mortgage payments in the event of you being unable to work due to an illness or injury.
You can opt for a budget policy that will pay for 12-or-24-months if you are off work. Or consider something more comprehensive that can pay until the end of the mortgage term in case you cannot return to work.
This is a crucial form of insurance for those with limited employer sick pay or for the self-employed.
Although the self-employed are eligible to receive Employment and Support Allowance (ESA) if they have to take time off due to sickness or injury, this is only paid for 13 weeks, at £74.35 a week for those aged 25 and over. For those with a mortgage, this is unlikely to cover any repayments.
Things you should consider when deciding if this is the right type of cover for you include:
- What savings do you have in place?
- Are you the only one earning in the home?
- What sick pay are you entitled to from work?
- Are you self-employed?
It’s important to get good, honest advice when you are considering taking out a new mortgage. Don’t know where to start? Get in touch, we will be happy to help you.