In the third and final instalment of mortgage related insurances I want to take a really rough and abbreviated look at life insurance.
On taking out a mortgage most people will insure the building (because they have to as a term of getting the loan), their contents (because it usually comes with the building insurance) and sometimes their life/lives for the term (because it seems a sensible thing to do). But when house prices are high and peoples’ incomes are stretched there is the tendency not to put cover in place or to cancel the cover they do have. So, if you are thinking of buying now make sure you consider your options.
The sorts of insurance product we looking at here are basic life insurance (term), critical illness cover (CIC), income protection (IP) and family income benefit (FIB).
Basic life insurance for a mortgage should be taken for the mortgage term remaining and, if it is a traditional repayment mortgage insurance should be on a decreasing basis But if an interest only mortgage is chosen then a level insurance policy should be put in place. Couples normally set this up on a joint life first death basis. If the borrower is single and intends to live alone in the property then there may actually be no need for basic life insurance.
Extra basic life insurance should be considered for dependents and other loans.
Critical Illness Cover (CIC) has a bad name in some quarters, especially as there are well publicised cases of insurers not paying out because of the ‘small print’. CIC is designed to pay out when you are highly unlikely to work again and will remain alive for some time to come. With that and the fact that today’s medicine is so good, modern policies are very tight in their CIC definitions but will pay out. Once again, if to cover a mortgage the same considerations as to the term of the policy and whether decreasing or level apply. If a single, sole owner/occupier this would be a good thing to have as well as for those with dependents. It usually comes with ordinary life cover attached. When considering a new policy think carefully before cancelling an old one because of the new tighter CIC definitions means an old one is usually far more likely to pay out.
The next product to consider is income protection. This can be put in place to cover up to 60-70% of your income. It is designed to pay out a monthly income either until the end of the mortgage or until you retire. Up to retirement would be the safest option. This would be very suitable for all mortgage borrowers.
Family Income Benefit is a normal life insurance policy that just pays out a set income for the remainder of the term of the policy. It is a cheap way of setting up an income for dependents should the breadwinner(s) die.
Basic life insurance would normally be written into trust for the beneficiaries in order for it to get paid out quickly without being tied into the estate on death. If it is a joint life/CIC policy then it should be split for trust purposes to make sure the CIC payment goes to the policy owner and not the beneficiaries.
This information is for general information only to give you something to think about when discussing your mortgage with an adviser/broker. There are many different types and products available so shop around. Also, don't forget to take into account any insurances you already have but think carefully before relying on employer benefits to fill this gap for the next twenty five years. Once you've set them up, keep the policies safe and make sure you know exactly what you've got and review them annually.