When taking out a mortgage you need to carefully consider what types of insurance you need.
There is one type of insurance which is usually compulsory when you have a mortgage, which is building insurance.
What is Building Insurance?
This insurance could save you a fortune if something damages your home, like a fire or flood as it would cover the cost of rebuilding your home.
Without building insurance, you would have to fund the rebuild of your home yourself and pay your mortgage at the same time!
You are required to have this in place upon exchange of contracts.
Other Types of Insurance
Although other types of insurance are not compulsory, there are definitely a couple of others that you should seriously consider.
Your mortgage is likely to be the biggest expense you have in your life, so you must think about what would happen if you can no longer pay it.
There are three types of insurance that can help you pay your mortgage.
- Life Insurance/Assurance
- Critical Illness Cover
- Income Protection
Do I Need Life Cover?
Although it may not necessarily be a lender requirement, if you have a joint mortgage, or if you have children or other dependants who live with you in the house you are buying with a mortgage, you need to think about how the mortgage would be paid if the unthinkable happened and you died.
A life insurance or assurance policy is often entered into when you take out a mortgage.
This means that should you die before the mortgage is paid off; the life insurance lump sum is used to pay off the remaining mortgage.
Is There a Difference Between Life Insurance & Life Assurance?
People often think these two types of insurance are synonymous, however, there is a distinct difference between the two.
For both types of life policy, you normally pay a regular premium to the insurer and in return, on your death, they pay out a lump sum to your beneficiaries i.e spouse etc.
What Is Life Assurance?
Assurance is something which is 'assured' to happen i.e. your death.
A life assurance policy pays out 'when' you die, not 'if you die'.
Life assurance pays out in the form of a lump sum and usually has some form of investment value attached to it.
This is because the value of the policy is expected to increase over time.
Most life companies will offer life assurance as well as life insurance, but life assurance can often be more expensive.
What Is Life Insurance?
Life insurance is based on something which might happen (again, your death); but during a specific time period.
Life insurance policies are therefore for a fixed term and are often purchased to cover another financial product such as a mortgage or a loan.
In other words, should you die during the life policy period, which will often coincide with the period of the loan/mortgage, then there will be a pay out.
Decreasing life insurance cover is often used for the term of a repayment mortgage or loan over a fixed period of time.
As the amount payable decreases, so does the life cover available.
What Is Critical Illness Cover?
This type of insurance pays out a lump sum if you get diagnosed with a serious condition, like cancer or if you suffer a stroke.
A critical illness can affect anyone at any age and can turn lives upside down.
In the event of being unable to work due to critical illness, having a backup plan in place can alleviate some of the financial stress of the situation.
Some people may use their savings to supplement their loss of income, others may rely on an employment benefit package, while others may find that Critical Illness Cover is their best option.
Each policy details exactly what conditions it covers and what are excluded so it is very important to check these details before you buy.
You can include critical illness cover as part of your life cover or take it out as a separate policy.
Are There Different Types Of Critical Illness Cover?
There are three different types of critical illness cover.
- Increasing Cover - The pay out amount and premiums rise with the rate of inflation each year.
- Level Cover - The pay out and premiums stay the same throughout the policy.
- Decreasing Cover - Premiums are usually lower compared to level cover, but the pay out reduces each month. You can use this to follow your mortgage as it is repaid.
What is Income Protection?
Income protection supports you financially if you have to have time off work and suffer a loss of earnings because of injury or illness.
People often think about taking out Income Protection Insurance when they are self employed and don’t receive any sickness pay, or rely on their health to make a living.
This type of insurance covers most illnesses that leave you unable to work.
For example, it may cover you if you are unable to work due to a stress-related illness or a serious heart condition.
Income Protection only covers you if you are unable to work due to illness or injury, it does not pay out if you are made redundant.
You could find a policy that lasts for just a year, or up to your retirement date. The longer the policy, the more expensive it is.
How Do I Decide What Insurance Policies I Need?
What cover you need very much depends on your individual circumstances. Think about why you might need cover.
Factors to consider are:
- • what would happen if you died or were ill for a long time
- • who are your financial dependants
- • what kind of financial support does your family have now
- • what kind financial support will your family need in the future
- • what kind of costs will need to be covered such as household bills, living expenses, mortgage payments, education costs, debts or loans, funeral costs
- • whether you can afford to pay regular premiums or a lump sum
- • what factors might affect your premiums – many life cover policies look at your age, occupation, lifestyle, pre-existing and family medical history
- • whether you would need to include critical illness cover because of your family medical history
If you consider all of the factors that affect you personally you will be able to decide what cover is best for you.
Circumstances can change so it is worth reviewing your insurance cover regularly to make sure you have the relevant policies.
As specialist advisors in the area of protection, we can arrange a consultation to discuss your current circumstances and budget and design a plan specific to you and your needs.
We use a panel of leading insurers in the market, and we do not charge a fee for this service!
If you would to discuss your mortgage and insurance options, get in touch with us to arrange a consultation.
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Disclaimer: Mortgages for Yacht Crew does not provide advice in relation to savings and investments. This article is intended for discussion only and does not propose financial advice in any way, and therefore should not be construed as such. Your property may be repossessed if you do not keep up with mortgage repayments.