Protecting your repayment mortgage against death or illness is a significant step towards financial security for both you and your family. Unexpected life events can lead to hardship, but with the right insurance in place, you can ensure that your mortgage doesn’t become an additional burden.
Mortgage Payment Protection Insurance (MPPI) is one way to maintain your mortgage repayments during times of illness or if you’re unable to work due to an accident. This form of income protection can cover your monthly mortgage payments up to a certain percentage of your gross monthly income, thus giving you peace of mind that your home is secure.
Life insurance can provide a lump sum to your dependents in the event of your death. This ensures that the mortgage can be paid off, relieving your family of the financial pressure during an already difficult time. Understanding the difference between life insurance options, like level term assurance and decreasing term assurance can help you to choose the right policy.
Understanding Repayment Mortgages
When considering a repayment mortgage, it’s important to know how it works and what happens if you’re unable to meet repayments due to illness or death. This will help you plan accordingly, ensuring financial security for yourself and your family.
Key Features of Repayment Mortgages
A repayment mortgage is designed so that you gradually pay off the loan, or capital, you borrowed from the lender, alongside the interest, through monthly payments. By the end of your mortgage term, which is typically around 25-30 years, you will have repaid the entire loan amount. Your monthly payments are calculated based on the loan’s interest rate and the capital balance.
Impact of Illness or Death on Mortgage Repayments
If you fall ill or pass away before your mortgage is fully paid, this can significantly impact your ability to maintain mortgage payments. In such cases, having a plan in place, such as mortgage protection insurance, is essential. This can help ensure that your mortgage continues to be paid, keeping your family’s home secure. If you die, the management of the mortgage usually passes to your estate’s executor and, subsequently, the named beneficiaries, who must deal with the ongoing payments or decide on a course of action.
An estimated 42% of mortgage holders do not have life insurance
Insurance Options for Mortgage Protection
Protecting your repayment mortgage in the event of death or serious illness is crucial to ensure your loved ones are not left with financial burdens. Various insurance options are available that can give you peace of mind regarding your mortgage commitments.
Do you need life cover to get a mortgage?
Mortgage lenders in the UK can’t make you take out life insurance for securing a mortgage; however, it is strongly recommended. Life cover ensures that your mortgage debt is paid off if you pass away during the mortgage term, offering your family security and preventing the property from potentially being repossessed.
You will find more useful information in our article: Do you need life insurance to get a mortgage?
Life Insurance and Mortgage Cover
Life Insurance provides a lump sum to your beneficiaries upon your death, which can be used to pay off the mortgage. Mortgage protection insurance, often referred to as ‘decreasing term life insurance‘, is designed specifically for repayment mortgages. The cover amount diminishes over time, closely mirroring the decrease in your outstanding mortgage balance.
Critical Illness Cover Explained
Critical Illness Cover pays a one-off sum if you’re diagnosed with one of the specific medical conditions listed on your policy. It can be added to your life insurance policy and can help cover mortgage payments or other costs during your recovery period. Conditions covered usually include heart attack, stroke, or certain types of cancer. Money from this policy can be used to pay off your mortgage, cover bills, or adapt your home to new needs due to illness or disability.
Income Protection Insurance Benefits
Mortgage Payment Protection Insurance (MPPI), also known as accident, sickness, and unemployment (ASU) insurance, covers your mortgage repayments if you’re unable to work due to accident, sickness, or unemployment. MPPI typically pays out for a set period, such as 12 months, ensuring you can meet your financial obligations while you recover.
Factors Affecting Insurance Premiums
When you’re looking to protect your mortgage, the premiums you pay for insurance can be influenced by several factors. Understanding these can help you find the most suitable and cost-effective cover for your situation.
Age and Health Considerations
Your age is one of the primary factors insurers consider when calculating your premiums. Generally, the younger you are, the lower your premiums tend to be. However, as you age, the risk increases, resulting in higher premiums. Health is equally crucial; pre-existing medical conditions or a history of serious illness can raise the cost of your premiums. Insurers may require a medical exam or access to your medical records to assess your risk profile accurately.
Smoking Status and Occupation Risks
Being a smoker will significantly impact your insurance premiums due to the associated health risks. Smokers are charged higher premiums than non-smokers. Moreover, your occupation can also play a role; if your job is considered high-risk, you might face increased premiums to account for this additional risk. It’s essential to be truthful about your smoking status and the nature of your work to ensure proper coverage.
Tax Implications and Costs
While the premiums you pay for personal insurance are not tax-deductible, it’s important to understand that any payout from a life insurance policy to protect your mortgage generally is tax-free. This means that your dependents can use the full amount to cover the mortgage without worrying about additional costs from taxation. However, it could have implications for inheritance tax.
Choosing the Right Policy
When protecting your repayment mortgage, ensuring you’ve chosen the right policy is fundamental. You want a policy that aligns with your specific needs and offers adequate coverage in the event of death or illness.
Understanding Policy Terms
It’s vital to get to grips with the policy terms before you sign on the dotted line. Terms define the scope and limitations of your policy. For example, a decreasing life insurance policy, typically suitable for a repayment mortgage, reduces the sum assured as your outstanding mortgage decreases. On the other hand, a level term life insurance remains the same throughout and could be preferable for an interest-only mortgage. Always read the small print to know precisely what’s covered.
Assessing Exclusion Periods and Waiting Times
Income protection policies will have exclusion periods and waiting times that can affect your cover. An exclusion period is a number of weeks or months when specific conditions or health issues aren’t covered. Meanwhile, a waiting period, often referred to as a deferred period, is the time between an illness or disability and when you start to receive policy benefits. It’s important to choose a policy with terms that you find manageable; shorter waiting times could mean a higher premium but quicker support.
Considerations for Self-Employed Individuals
If you’re self-employed, securing your income is even more pressing, as you won’t have the same safety nets as traditionally employed individuals. Check if the policy offers flexible coverage that caters to the fluctuating nature of your income. Moreover, be clear about whether the policy includes total or partial disability coverage and how it defines incapacity within your line of work. Ensure the quote you receive reflects these nuances, as standard policies may not fully address the complexities of your employment status.
Your family could be left with a lot of debt if you die and don’t have insurance in place. They may have to sell your home to pay off the mortgage, or they may struggle to make the repayments themselves.
Deciding whether or not to take out this kind of cover is a personal decision, and will depend on your circumstances. You may feel that you don’t need it if you have other insurance policies in place.
It’s important to note that your policy may not completely pay off your outstanding mortgage owed. You’ll need to make sure your amount of insurance is adjusted to match any new mortgage arrangements or changes that have taken place.
You must also check that the length of the policy is long enough to cover the duration of your mortgage term and that the interest rate applied to your mortgage doesn’t become higher than the interest rate applied to your policy.
If you’re not sure whether or not you need life assurance, speak to a financial adviser.
