Why is protection important when taking out a mortgage?

Thursday March 5, 2020

Why is my Mortgage Advisor talking about ‘protection’? Well, for most people, their mortgage will be the largest sum of money they will ever borrow. That’s why our advisers work so closely with our clients to ensure it’s a loan which is going to be affordable in the long-term. However, life doesn’t always go to plan and that’s why we always encourage our clients to carefully consider their protection options.

Do I have to have mortgage protection?

If you’re taking out a mortgage, the only protection that is normally mandatory is buildings insurance, which covers your property in the case of damage or burglary. However, most experts in the mortgage market strongly support taking out types of protection which will repay your mortgage if you die or become too ill to repay it yourself.

What are the benefits of each of the different types of cover, and which should you consider? Our Associate Director and resident protection expert, Daniel Gracie, explains:

What’s the difference between Life Assurance and Mortgage Protection?

Life Assurance is a broad term that covers protection needs from mortgage debts through to life events. A Life Assurance policy could leave a lump sum benefit to a loved one or it could pay them a monthly income benefit. It can be taken out to cover general monthly expenditure, specific liabilities such as annual school fees, or future events such as a child’s wedding or the deposit for their first home. It’s about replacing the financial benefit that is lost along with your life. Mortgage Protection is a specific term that relates to repaying your mortgage balance in the event that you die (or become critically ill).

It’s important to be clear whether you’re looking for general life assurance or a protection policy that is designed to complement your mortgage(s). Our team can help discuss your needs to help you decide which will work best for your individual situation.

What are the benefits of Mortgage Life Assurance?

The best people to answer this question are your loved ones. If you die and leave a mortgage against a home, many banks will foreclose the mortgage, even if that home is shared with your family members or your partners. Without a life assurance policy how would your loved ones repay the debt? We strongly advise all of our clients to assess what bearing their debts would have on anyone else in the event of their death and our experts are always happy to talk you through this and help you identify your own individual protection needs.

What is Critical Illness Cover?

As well as paying out in the event of your death, your life assurance policy can be set up to pay out if you are diagnosed with a critical illness. It can cover a number of critical conditions like cancer, heart attack, stroke, blindness, deafness, paralysis, loss of a hand or foot or third-degree burns.

I’ve read about level and decreasing term policies – what do they mean?

Depending on the need being covered, your life assurance policy will either need to decrease or stay level; it may even need to increase. Generally speaking, a repayment mortgage would be covered by a decreasing term policy that would decrease in line with the mortgage balance and over the same term. Some liabilities, like interest only mortgages or school fees, do not decrease and so a level term policy that would pay out a fixed benefit for the chosen term would be more appropriate. And then there are increasing liabilities, like living expenses, that would be best matched by a monthly income benefit set to increase in line with the Retail Price Index.

What happens to my protection if I have more than one mortgage?

You can take out a policy to cover each mortgage. That way, each debt can be matched by an appropriate type of policy over a relevant term and can be cancelled when either the mortgage is redeemed, or the property is sold.

What happens to my protection if I move to a new house and change my mortgage?

Life assurance policies are not usually assigned to specific mortgages nowadays; they are just set up to match them. So, if you change your mortgage and the policy remains relevant, then there may be no need to change it. If, however, you change the size, type or length of your mortgage then your policy may need to be rewritten. With any change to a mortgage, we would advise you speak to our experts who can review your situation and advise on the best protection solution.

What is an Income Protection Benefit?

This is a very different type of policy that also falls under the general term of ‘life assurance’, even though it does not cover against death. Unlike Critical Illness Cover, which pays out on the diagnosis of a specified list of conditions, Income Protection policies pay out a monthly benefit if you are deemed too ill to carry out your occupation. You do not need to own an asset like a property to take out an Income Protection policy; anyone who works may be eligible to protect their income, subject to health and the type of occupation that they do. Policies can be taken out to extend your sick pay to one or two years or to cover your income for longer, perhaps all the way up to your retirement age.

How do I find out which is the best option for me?

Like every financial decision, it’s best to weigh up what you want and need and speak to a trained adviser who can provide counsel on the best course of action. All of the above are suitable options, depending on your specific, individual circumstances.

Large Mortgage Loans does not charge any fee for arranging mortgage protection policies and our advisers are at the end of the phone ready to discuss your options, so please don’t hesitate to get in touch on 020 7519 4900 or send us an email.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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Your home or property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Changes in the exchange rate may increase the sterling equivalent of your debt. You may have to pay an early repayment charge to your existing lender if you remortgage. Think carefully before securing any other debts against your home.  

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