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Mortgage Protection (Part 1)
Gary Boakes answers some frequently asked questions on mortgage protection in this two part episode.
What is mortgage protection insurance and how does it work?
There are actually different answers I could give about mortgage protection insurance. Most people think of life insurance, to pay off the mortgage if you die. But another way of looking at it is that mortgage protection insurance could help you pay the mortgage payments if you’re unable to work due to illness, injury or redundancy.
When we talk about mortgage protection insurance, we’re considering a range of products that are there to help you and your family not only pay your mortgage but get through any challenging times in your life.
What are the different types of mortgage protection insurance available in the UK?
There are three to four major ones that we talk to our customers about. The first one which everyone considers is life insurance. Life insurance provides you with a lump sum of money if you were to die. That then goes to your partner, your family – whoever you want to leave it to.
Then you have critical illness cover or which again provides a lump sum of money if you are diagnosed with a serious illness. According to Legal & General’s claim statistics in 2022, over 60% of all claims on critical illness policies were for cancer related issues. It’s huge for that.
You’ve then got income protection, which provides you with an income on a monthly basis if you can’t work due to injury or illness. That works very differently. We obviously have statutory sick pay in the UK and we potentially could have benefits from our employer to pay us for a certain period of time. But potentially that won’t run for the full length of your mortgage or for the full length of your injury or disease.
There’s also a product called family income benefit. It’s quite like life cover. If, for instance, I were to die, my life cover lump sum goes to my wife and family and that pays off our mortgage debt. But what’s also happened is that my income is gone. So family income benefit replaces that income for you. It means my wife would receive money on a yearly basis to supplement what they’ve lost by me dying.
Family income benefit tends to relate to children – a lot of the policies run until the children are 18 or 21. There are obviously quite a lot of other products that we could include, but these are the major ones that we talk about with our mortgage customers.
What are the benefits of having mortgage protection insurance?
It’s reassurance. You’re reassured that you’re not going to be financially impacted straight away if something happens, if someone becomes ill or dies.
And, sorry Michelle, but if she died, I at least know that there is going to be a lump sum of money to help me pay off the mortgage and maybe other debts. Maybe there’ll be a bit of income there for me and the children and that’s obviously going to be a huge benefit.
If you develop a critical illness, what does that look like? Are you going to have to take time off work? Will you actually even be able to work? What will your employer offer in terms of your sickness benefits?
Generally there’s not an endless source of cash out there from the government or employers. So a big lump sum from a critical illness policy or a monthly sum from income protection is going to give you options. You can focus on the most important thing, whether that’s getting better or that grieving process, without having to worry about bills.
Unfortunately we live in a world where everything costs money. There’s a cost of living crisis at the moment where we’re more aware than ever of how much things cost. To lose an income due to an injury or an illness can make things financially very difficult for people.
So for me the major benefit of protection is that reassurance that you don’t have to panic about your mortgage or your bills straightaway. You can focus on what’s important.
Do I need mortgage protection insurance if I already have life insurance?
If you’ve taken out life insurance, fantastic. But there’s generally a reason why someone’s taking out life insurance. If you bought in life insurance before you had a mortgage, and you’ve now bought a house, do you need to look at it again? Perhaps it was just for personal protection before – do you want it to now cover your mortgage?
Also, does your current life insurance cover the new mortgage? Will it last the same length of time? We will do an in-depth review of the policies you currently have to make sure they fit your circumstances and goals.
As I mentioned earlier, everybody thinks mortgage protection is life insurance. But critical illness cover and income protection are also really important. If you have no income, how are you paying for your life insurance? Just because you have a life policy in place, it doesn’t mean you can’t look at other aspects of cover as well.
What factors should I consider when choosing a mortgage protection insurance policy?
The key is what you want it to be for. For a single person buying a property, I explain that life cover is generally bought for someone else. So is that going to be massively important for a single person buying a property on their own? Maybe not, unless they want to leave it to someone. Instead, they may want to focus on critical illness cover which actually directly impacts them and directly helps them.
For a couple buying together, do they want to buy joint cover or buy it singly? Do they want extra cover for the children? Do they want to cover one income and not the other? There are lots of factors that go into that and no two circumstances are exactly the same.
No family dynamic is exactly the same. We will take all of those factors into play when we’re trying to design the right protection policy for you and your family.
Can I get mortgage protection insurance if I have a pre-existing medical condition?
Yes, you can. It does depend on what the pre-existing medical condition is and the severity of that condition, and whether you’re still having tests for it.
When we recommend you a policy, if there are pre-existing medical conditions we can check with the insurers on whether they will exclude the condition or increase the price of the policy because of it.
Before any policy starts, you have to go through a health questionnaire to determine any conditions you may have and the risk factor is based on that. I’ve known people to get critical illness cover when they’ve had cancer in the past. I’ve had people have mental health issues excluded from their policy because they’ve had depression.
It varies from insurer to insurer and on the specific conditions. It’s something that we will discuss with you as we’re going through our policy recommendations.
Are there any exclusions or limitations to mortgage protection Insurance policies?
Exclusions and limitations are generally based on your health. Insurers have the ability not to give you a policy based on that, and also on the type of work you do. It’s very difficult for someone in the army to get income protection, for example. Certain categories of jobs are limited in the policies they can get.
Age is a factor as well. Providers will have ages that their policies will go up to depending on the type of job and how much you want to insure yourself for. There are exclusions and limiting factors that depend on your circumstances.
How long does mortgage protection insurance coverage typically last?
Again it depends on the type of policy. With life cover, it does vary by insurer but some will go to the age of 90. Potentially there is a maximum age at which you can start taking life insurance out as well – one example of that is age 77.
There are also variations depending on the type of policy. With income protection the maximum age may depend on the type of work you do. Someone in an office environment doing an admin-based job will be able to take their income protection policy longer than, for example, a labourer or someone in a hands-on job.
What happens if I can’t pay my mortgage due to unforeseen circumstances?
Your mortgage offer talks about the consequences if you are unable to pay your mortgage payments. In big, bold black letters it says that as a last resort we may repossess your property. Ultimately that is the worst case scenario.
Falling into arrears or missing payments is not great and goes against you in the future. So mortgage protection is there to try and limit that happening. If you’re off work and you’re only receiving statutory sick pay, income protection will kick in to help you pay your mortgage payments.
If you are diagnosed with cancer and you can’t work because you’re having chemotherapy, there’s a lump of money to help you pay your mortgage payments.
We know life can be quite cruel, and you never know what might happen. But ultimately if you don’t pay your mortgage, it does lead down a dark path to repossession.
This is a tricky part of our job – nobody likes to talk about death or being ill. I’ve come across people that have a ‘Superman’ complex where they think it will never happen to them. But most people have seen something unexpected happen within their own family or social circle or even to celebrities.
What is the cost of mortgage protection insurance? How is it calculated?
It’s a very difficult one to answer – so many different factors affect the cost of your policy. These include your age when you apply, the age that you’re going to take until, the insured amount and whether you smoke. That’s a big one. Pre-existing medical conditions also factor into the cost.
From a provider’s perspective they will look at your risk and use complex risk statistics to calculate the price. If you’re a 20 year old male taking a life policy to 40, statistically your life. expectancy is a lot longer so your cover is going to be quite cheap.
It’s all based on statistics and previous claims on other policies. It’s a bit like car insurance – if everyone else has crashed their cars at a young age, that’s why we get hit with expensive car insurance when we’re eighteen years old.
With protection, as you get older, statistically more things are likely to happen to you and that will affect the cost. It’s very complex.
Is mortgage protection insurance mandatory in the UK?
Actually your mortgage offer will tell you what is mandatory. Building insurance is mandatory for a mortgage and it states that on your mortgage offer. Life insurance isn’t. It’s recommended in your mortgage offer and your solicitor’s paperwork, but it’s not mandatory. It used to be, but no longer.
Can mortgage protection insurance cover more than just the outstanding mortgage amount? Can it help with other financial obligations?
You can have a life policy to cover your mortgage, but you may want more. You may want to be able to provide a lump sum to your surviving partner, your children, your family. There is an element of personal protection in there.
Ultimately, you can insure yourself for as much as you see fit as long as there’s a good reason for it. We don’t like to pick numbers out of the air. We will want to understand what you want to do and why.
But you can certainly insure yourself for more life cover or critical illness cover. With income protection it’s different, because it’s based on your current income. You can’t just decide to insure yourself for £100,000 a year when you only earn £40,000 – there are limitations on that.
You can use life and critical illness cover to help with other debts if you have them. For example if you’ve taken a 10 year loan you might want to cover that. If you have savings, some financial planners will look at those and see if you want to cover that as well. Just in case. Mortgage protection is there to protect you and cover what you need it to.
What are the alternatives to mortgage protection insurance?
Mortgage protection is a range of products – life insurance, critical illness cover, income protection, family income benefits etc. There are alternatives within that overall area of insurance. It’s basically taking a range of different policies and creating cover that’s suitable for your circumstances and for your family.
I saw some statistics about income protection earlier today – and only 8% of adults in the UK have this. That’s just so low, considering that income is the one thing that gets us through life.
There’s an analogy of having a machine in your basement that on the first of the month churned out lots of money. You would make sure that machine was serviced and well looked after so every time you pressed that button it would give you the money.
But we are that machine. We’re the ones that need servicing to make sure we can pay that mortgage payment for potentially 35 years. That’s an awful lot of mortgage payments to be healthy for. You need to never fall over in the snow and break your leg and not be able to work. I’ve had someone claim on an income protection policy for that reason.
So that’s why we invite people to talk to us about their circumstances and what feels important for them and what they want to cover. Some will find it really important, and others might worry about the cost.
But in that situation we can look at how much you’re willing to spend instead and budget with that. £50,000 in critical illness cover may not pay your whole mortgage off, but it’s better than having no safety net at all if something were to happen. It’s really important to just think about this and discuss it with a professional.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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We want to give you peace of mind, knowing that no matter what happens, you’ll enjoy a financially secure future.
Mortgage Protection (Part 2)
We continue the conversation about mortgage protection with Gary Boakes.
How long does it take to process a claim for mortgage protection insurance?
It depends. It can take several days to potentially a month. The claim has to be processed, so the provider needs to make sure that the claim is valid. With life insurance, they need to verify the death certificate etc.
So there are certain things that they need to do before they provide you with the money. It depends on the circumstances and the provider.
Are there any age restrictions for obtaining mortgage protection insurance?
There are, and it does depend on the type of product that you pick. As an example, with Aviva the maximum age for life cover is 90, but the maximum age to start a policy is 77.
It can also relate to the type of work that you do. With income protection, if you’re in an office-based role it’s likely you’ll be able to take that policy to an older age than if you’re a teacher or nurse, in a job that requires standing and moving.
We’ll talk all these types of restrictions through with you depending on the type of policy that you’re looking to take.
Should I consider reviewing or updating my mortgage protection insurance policy?
Yes, and it depends on what you took it out for. If your mortgage has changed, you’ve moved property or you took out some additional borrowing, your life insurance may not now cover the full amount.
Or it may well be that you weren’t in a financial situation to afford much critical illness cover previously, but now you feel that it’s important to increase that.
With income protection, perhaps you previously worked for a company that provided you with some really really good sickness benefits. But now your new company doesn’t – so a policy could give you peace of mind.
Your circumstances are changing all the time and when you took out a policy you will have had certain goals in mind. We would make sure that it still does what you wanted it to do.
There may be some health factors as well. I mentioned previously that if you smoke, that would increase your policy cost. Maybe you don’t smoke anymore – if you’ve gone two or more years without smoking, even though you’re slightly older we may be able to find a cheaper policy.
Another health factor is your Body Mass Index – perhaps that had an impact on the cost of your policy, but actually that’s no longer an issue. So there are certain factors we should always be looking at and reviewing.
Will mortgage protection insurance cover unemployment or redundancy?
There is a separate policy for redundancy. It’s an accident, sickness and unemployment policy. It generally covers your mortgage payments for 12 months if you are made redundant.
These policies are probably a bit harder to get at the moment, due to the financial climate we’re in. There will be fewer insurance companies looking to offer those types of policies because the risk is higher for redundancies at the moment.
But there are policies out there. We can look at them, but most people focus on their health aspects because there are more providers covering that than the redundancy side.
But what should I do if my circumstances change after obtaining mortgage protection insurance?
It depends what the change is. The easy answer is to just get back in touch with ourselves or the person that initially set up the policy. Talk through the circumstances and we’ll advise whether we can make changes to the policy for the better.
Perhaps something has happened or your health has got worse, and you’re wondering if you should let your providers know. It does depend on the type of policy. It may well be that your premiums are guaranteed or reviewable.
With a guaranteed premium, the policy was based on your health at that point in time – it doesn’t matter if your health deteriorates. The idea is that you then potentially can claim on health issues.
But with policies that are reviewable, you would need to make the provider aware of any changes. We can advise you on the right approach.
Can mortgage protection insurance cover joint mortgages?
Yes, and for example, my wife and I have a joint life cover policy for our mortgage. You can take it jointly or you can take it separately.
Again it depends on your circumstances and, potentially, the cost. There are different ways we can do it for you.
Is mortgage protection insurance transferable if I switch lenders?
Yes, because it’s not linked to the mortgage lender. It isn’t a requirement of your mortgage and it isn’t linked to your lender. It’s basically an amount taken to cover your mortgage. So if you’re taking that same amount of debt from say Halifax to Santander, as long as the life insurance still covers the new mortgage, you can still use it.
What happens if I move house with mortgage protection insurance?
It’s pretty similar to changing mortgages, but it does depend on whether your mortgage is increasing or decreasing. Are you upsizing or downsizing?
If you’re upsizing, then does your policy cover the mortgage on the new property? If you’re downsizing, perhaps you don’t need as much cover. If you’re moving property, you’re moving for a reason. So we need to make sure that the mortgage protection in place still covers that reason.
Does mortgage protection insurance cover critical illness or disability?
It depends which policies you choose. Under the banner of mortgage protection, you can have life cover and a critical illness/serious illness policy. They can be done separately or they can be joint policies. But there are certainly policies that cover critical illness and disabilities.
Can I cancel my mortgage protection insurance at any time?
Yes. With most life insurance, critical illness and income protection policies, you are paying for the cover on an ongoing basis. There’s generally not an end value and you’re not tied in, so you can leave whenever you like.
It’s not like car insurance, where if you leave after six months there’s a penalty. You can stop your policy tomorrow – but the day after, you’re no longer covered. It’s what we call a ‘day one policy’ where you’re only covered when you pay.
Do mortgage protection insurance policies come with a cooling off period?
Yes, like anything really, there’s always a cooling off period. It’s usually 30 days from taking the policy out. You can change your mind within that time.
What documents or information will I need to provide when applying for mortgage protection insurance?
It will depend on the type of policy. If you’re taking out life insurance to cover your mortgage, we’re going to need to know how much your mortgage is, how much the payments are and the time left on it.
With an income protection policy, if you’re self-employed we’re going to need an average of your last three years’ accounts etc – so there is certain documentation that we will need, depending on the policy.
We also need to know about your overall health. You are going to be asked about whether you have been to the doctor’s in the last three or five years. So you’ll need to have an idea of what has happened.
If someone previously had cancer, we’d need to know what type of cancer it was, when you had it, how long for and any provisions still in situ. Knowing that up front is really helpful because it helps us know which providers will or won’t take your circumstances.
Again, we’ll be able to explain which documents you will need or give you an idea of other information needed depending on the protection you want to take.
Will mortgage protection insurance premiums increase over time?
They can. Again, it depends on the type of policy. If you take a decreasing, guaranteed life policy then it’s going to be a set price for the next 20 or 30 years.
But you might want to index link your cover – you may want your income protection to increase in line with the retail price index (RPI). You might want your critical illness cover to increase over time. If you take out £50,000 in cover, that seems like a lot of money now. But is £50,000 still going to have the same value in 10 or 15 years?
If we link anything with inflation, and if we’ve made anything reviewable, yes, your premiums can increase. We would let you know whether or not that applies to a policy that you’re taking.
Your home may be repossessed if you do not keep up with your mortgage repayments.