Mortgage Protection

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Why is mortgage protection so important? 

I think most people will assume mortgage protection is life cover, when actually, other things are covered as well. Mortgage protection is so important because, for example, if you’re a couple reliant on two incomes to pay a mortgage and one income is lost, how else would you pay your mortgage?

If someone dies and leaves someone that isn’t an earner with a house and no life cover to pay off the mortgage, all of a sudden that person can’t pay the mortgage. People think it won’t happen to them, but it does happen.

What happens if somebody doesn’t take any mortgage protection?

If you become unable to pay your mortgage and it isn’t protected, then you are at the mercy of your lender. The mortgage still needs to be paid. Depending on the circumstances, most banks may be compassionate enough to allow some time to sell the property, if you can’t pay the mortgage. But, of course, there is the possibility that they could take the house, particularly if there aren’t extenuating circumstances surrounding your inability to pay.

What is life insurance? 

Life insurance, in its simplest form, is the payment of a lump sum by an insurance company to another individual, when someone dies. There are nuances in terms of how we set those policies up, which is where proper advice is important.

Life cover can be set so that the amount of insurance never goes down as years go on, or it can decrease along with a debt that’s decreasing, like a mortgage. You will need to set a term for that life cover for 20 years, 30 years, 40s, whatever the term is. 

What is critical illness cover? 

Lots of people often get this confused with terminal illness cover, which is included in most basic life insurance policies. This comes into play when a doctor diagnoses you with less than twelve months to live. Often the life insurance company’s policy will pay out before your death.

Critical illness cover is very different. There is payment of a similar lump sum, but this is payable on diagnosis by a doctor of a critical illness. Different insurers have a huge range of illnesses that they deem critical illnesses, but usually always include cancer, heart attack and stroke. Having a policy that pays out a lump sum on diagnosis of an illness when you can no longer work, or won’t be able to for some time, can be a huge relief. If it’s affordable, then this option is highly recommended.

Can you combine policies together?

Yes this is definitely possible and many insurance companies are even able to tailor policies to fit individual circumstances. Most policies are a blend of attributes of each type of cover and individual separate covers are not often used.

What is income protection and how does it differ from the other policies?

Income protection relates to what happens to your income and your job if you’re off work sick. Most employers will have some degree of sick pay policy, but there will be  a point in time where if you’re so sick that you can’t do your job, and you haven’t been at work for a period of time, they are going to stop paying.

Income protection replaces your income when you’re too sick to earn it yourself. If the subjects are detailed enough to need proper advice, it’s important to take it on income protection and critical illness.

What is family income benefit?

Family income benefit is a type of life cover where a payment of money is passed to a family member if someone dies. In a two parent family, for example, should one of those parties die, family income benefit could pay the survivor an income, tax free, every single month. 

It could be set up to pay the youngest child until they are around twenty-one, or whatever we deem a non-dependent age to be. Essentially, it’s a payment of income to help raise children. Monthly payments rather than a lump sum can be very convenient for families and it’s also a little bit cheaper than lump sum life cover. 

How do you plan for inheritance tax?

Most people will take advice when it comes to inheritance tax, as it’s a fairly complex subject. There are certain forms of life cover, such as whole-of-life policies or joint life, second death policies, that can be really used when it’s deemed that there could be an inheritance tax liability.

Inheritance taxis when someone’s died and they are deemed to have such a large estate, that it goes beyond what their allowance of just over £600,000. HMRC taxes the beneficiary on the additional value of their benefactor’s estate. So actually, inheritance tax is usually a problem for a policy holder’s children, rather than themselves because the liability is posthumous. Certain types of insurance can be put in place to help with the paying of those tax bills. It’s a very detailed subject, but certainly one where people need professional advice.

How much should I budget for protection? 

In terms of budget it’s best to consider affordability in a holistic way, particularly as it is often taken alongside a mortgage. As Mortgage Brokers we will look at someone’s overall budget and consider mortgage and protection related matters together. Once we’ve agreed the overall budget, we can then perhaps sometimes mould the mortgage to ensure protection can be paid for as well. 

There are layers of different options so being unable to afford a high level policy doesn’t mean that you should not have any protection, it’s better to have something in place, than no cover at all.

How can Purely FP help with your protection needs?

You can get in touch with us, here at Purely FP, to have some open discussions about protection in as much detail as people need.

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