What insurance do I need now I have a mortgage?
Purchasing your first home, moving to a bigger house with a larger mortgage, or taking out additional borrowing for home improvements are all instances that give a chance for you to review your protection requirements.
Many people are aware of life insurance however they are unclear of its importance, what life insurance covers and how it can interact with other types of insurance such as income protection.
The type and value of life cover, and financial support needed from the various protections available, will depend on an individuals personal circumstances. There is no 'one-size fits all' approach to insurance, so it is important to seek advice if you are unsure of how much cover is appropriate for you.
There is no legal requirement for any life insurance, critical illness cover or income protection once you have obtained a mortgage. It is however, often a condition of the mortgage to have buildings insurance. There are six types of insurance you should consider when taking out a mortgage:
This pay out will usually cover the cost of rebuilding the property in the event of fire, flood or any other structural damage to a property. Typically the property itself, permanent fixtures such as kitchens and external buildings such as garages are covered. Without this cover you may be responsible for the cost of rebuilding the property, while also continuing to meet your monthly payment for your mortgage.
If you are purchasing a leasehold house or flat, the property will still need correct buildings insurance, however it may not be your responsibility. This would normally lie with the landlord who owns the freehold. It is important to ask your solicitor who is responsible for insuring the building.
In addition to a cash sum covering the cost of rebuilding the property, it is also worth considering protection the things you put inside it. You should not under-estimate the cost of all your household items, from TVs to clothes.
It can often be cheaper to purchase buildings and contents insurance as a joint policy.
A life insurance policy (sometimes referred to as life assurance) can be written to protect you (and your partner) for any amount you feel appropriate. In the context of a mortgage, the minimum recommended lump sum payment would be that of your outstanding mortgage balance at the time of your life insurance application.
It does not have to be written on this basis however. Cover can be written as joint life insurance policies, or single life and can be written to any value you think is suitable for your needs - you can make life insurance work almost anyway you need.
What type of life insurance is appropriate for you will depend on how much financial protection you want and what is appropriate for your circumstances. You should be mindful that too much protection can result in the life insurance pay out being subject to inheritance tax.
It is important to have a look at the open market for life insurance quotes. These can differ in levels of cover and monthly cost. A financial adviser will be able to review the whole market for you and then make a recommendation of the most suitable solution for you.
This is a policy in which the pay out decreases over time. This will roughly be in line with the decreasing value of your mortgage. This type of policy ensures that the monthly premiums are kept as low as possible and is a form of cheaper life insurance than those list below. It would only be suitable for those on a repayment mortgage.
Unlike decreasing life insurance, this form of life insurance pays out a specified lump sum, which remains the same throughout the term of the policy. This will provide more cover than a decreasing policy, but at a slightly higher monthly cost. This form of cover would be particularly appropriate for an interest only mortgage, where the balance of the mortgage is not decreasing as it would with a repayment mortgage. It may also be useful because the cash sum remaining once the mortgage balance has been cleared provides some protection for funeral costs.
The most comprehensive life insurance policy will increase over time at a set rate e.g. by inflation, or 5%. The cash sum paid to you or your beneficiaries in the event of death should not only clear your mortgage balance, but leave a surplus which can help cover additional expenses such as funeral costs and assist with the remaining family's cost of living, if needed.
In the event of diagnosis of a serious illness, you can arrange cover for cash sum to be paid to you. Life insurance will cover the 'worst case' scenario, but you should also consider the impact of a life changing illness. This does not have to be a terminal illness, but would need to meet the definitions of a critical illness as defined by the provider, so it is important to check the level of cover you are applying for.
The cover can be written on any value you would like, but individuals often take into consideration childcare costs and other financial commitments that are likely to remain regardless of your health.
This is an additional benefit, usually added as standard to a life insurance policy. In the event you are diagnosed with a terminal illness which means you have a life expectancy of less than 12 months, the life insurance would pay out.
You may decided to add critical illness cover to your life insurance cover. How this is done will depend upon the life insurance provider and it is important to seek guidance from your financial adviser on the most suitable option for your needs. This would also be in addition to the standard terminal illness cover in the life insurance cover.
You will not always get lower monthly payments by combining the two types of protection, so looking at both options is likely to ensure your life insurance cost is kept to a minimum.
In a similar vein to life insurance, the critical illness cover pay out may form part of your estate on death and be subject to inheritance tax.
You can have cover for a critical illness inn the same way that you can have decreasing, increasing or level term life insurance. Each type will have a bearing on cost, so it is wise to seek advice on the most appropriate policy.
This type of insurance provides cover for serious injury or illness that prevents you from being able work. You don't need to have a mortgage for this cover to be appropriate however it can provide invaluable financial support when you have lost your earnings. It will ensure you can meet you monthly payments for your mortgage but also help cover childcare costs, food bills and any other essential or discretionary spending.
The policy will provide a monthly tax-free income, the equivalent of circa 65% of your gross earnings, rather than a cash lump sum pay out. The exact pay out will depend on the insurance providers rules and your tax status when the policy is written.
Many individuals have some form of workplace benefit. Doctors employed buy the NHS in particular, receive excellent sick pay benefits and a policy can be written to taper with those benefits to keep monthly payments minimum.
The policy can be written to cover your outgoings for a short period of one or two years, or until your projected retirement. Unlike a joint life insurance policy, this can only be written to protect you as the applicant. There is also no terminal illness protection as such however there is protection most illnesses that prevent you from being able to work.
This is another form of life insurance policy but rather than a lump sum, your beneficiaries would receive an ongoing income over the term of the policy. This life policy would also have terminal illness cover applied.
This type of life cover is particularly important for those with children who would require ongoing financial support.
Clients often assume that the benefits they receive through their workplace preclude the need to take out your own life insurance policy. While the NHS in particular does provide death-in-service benefits, this is capped at twice your pensionable salary. If your mortgage value is greater than this, your mortgage would not be cleared in the event you die, so it is recommended you seek a separate life insurance policy, written to cover the value of your borrowing.
There is also no terminal illness benefit, so you would not be able to clear your mortgage and enjoy your remaining time with your family without financial burden.
The need for life insurance, critical illness cover, or any other type of protection will depend upon your personal circumstances. Often individuals will opt not to buy life insurance where they are happy for the executors of their estate to sell the property.
Where you have dependents that rely on your earnings to meet your mortgage repayments, ensuring that they can remain in the family home upon your death or inability to work is crucial.
You can obtain a life insurance quote online, and purchasing a policy with an insurance provider can be done with relative ease. Creating a comprehensive plan, where you may have multiple life insurance policies and cover for critical illness as well as serious injury, requires knowledge of the protection industry.
When you compare life insurance quotes, it is not clear who has the best service levels or pay out rates so buying life insurance can come with greater complexity than it seems at first.
Once you have decided on the appropriate level of cover, you will apply directly with the chosen insurance provider. You will answer questions about your medical history and lifestyle. Any pre-existing medical conditions can have an impact on the life insurance quote or type of cover given. For example, a pre-existing medical condition may be excluded, or a hobby such as skydiving may not come under the terms of the cover.
Where you have applied for joint life insurance, you will both be required to undergo the health and lifestyle questionnaire. Joint applicants can have differing levels of cover or the cost can be increased as a result of the declarations made by one of you.
Life insurance is traditionally only available to UK residents however this can depend on the life insurance provider. You will also need have been registered with a GP for the last two years.
Life cover is not a taxable benefit, nor are any of the other policies listed above, they would be received as a cash sum.
If there is an illness in you family's medical history that you may suffer from, this could affect the level of cover you can obtain. For example, a genetic illness that may affect your life expectancy, may increase your monthly cost or be excluded form cover altogether.
Life insurance pay outs are not guaranteed however it is unusual for a life insurance policy to not pay out. If this does happen, it is usually due to the applicant not declaring a pre-existing medical condition.
A trust is a legal arrangement which ensures the pay out from your life insurance policy is protected from charges applied to assets in your estate on death. Claims paid into trust are not usually liable to inheritance tax however we would suggest seeking legal advice if you are unsure.
How much life cover someone needs is very personal. It will depend on their attitude to illness and injury, as well as any liabilities and dependents they may have. If you would like to discuss suitable life insurance policies, please click here to book a meeting with one of our advisers.
If your financial circumstances have changed and your existing policy needs reviewing, it is sensible to keep your existing cover in place until the life insurance provider has accepted your application alternative policy. It is better to have some form of pay out even if the amount is not quite correct than to have no pay out!
The cost will depend on the level of cover, the term of the cover and any previous health concerns you may have had. There is always a balance to be found between the amount of cover you may want or need, and the amount you are willing to pay for it. Our adviser will help guide you in that decision making process.
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