Gary from The Mortgage Brokerage joins the Mortgage and Protection podcast to talk through mortgage protection.
Why is mortgage protection so important?
Your mortgage is the biggest debt you will ever have in your lifetime – and it is a huge risk not to protect your family from that debt with products like life insurance and income protection. People insure their cars, their pets, their mobile phones, their washing machines… and yet it’s really common for people not to have life and critical illness cover.
What happens if you don’t have mortgage protection?
Say a couple had a joint mortgage and one of them died, the remaining partner would have to find the money to pay the mortgage each month. With property prices so high, people maximise their borrowing and often mortgages are unaffordable on a single income.
Without mortgage protection there is the chance that the surviving partner could lose their home, or be forced to sell – at an already stressful time.
Why do we need life insurance generally?
You need life insurance when people depend on your income, to help them carry on after your death. Nobody wants to leave their loved ones without any money to live on, or liable for outstanding debts.
For the price of a night out each month – or less – you can protect your home and your family for life.
What is critical illness cover and do I need it?
Critical illness cover provides you with a lump sum of money if you are diagnosed with a specified critical illness. Different providers have different variations of this – with companies covering you for various serious conditions including cancers, heart attacks, stroke, brain tumours… up to around 36 different health issues.
Research shows that one in two of us will be diagnosed with some form of critical illness before we retire. We’ve had clients who have been diagnosed with cancer and heart conditions, received the lump sum stated in their policy and used it to pay off their mortgage. Many have since recovered and are now mortgage free.
You can also use the lump sum to fund private medical treatment, or to fund retraining or part-time work if you find that post-treatment, you no longer want to return to your previous role.
What is income protection?
Income protection is an insurance that will pay out a regular income if you cannot work because of injury, disability or a long term health issue. It will pay out until you return to work or the plan runs out.
The amount of income you claim will not be as much as normally you earn each month, but you can expect to receive about half to two thirds of your earnings before tax from your normal job. The income you get from the policy is tax free.
It’s a fantastic policy that protects your income and your lifestyle. Usually you cannot claim on income protection straight away, you have to wait a minimum of four weeks.
But depending on your job you might get six months of sick pay – and you can set up your income protection policy to defer until your sick pay would reduce. This will also make your premiums cheaper.
It’s an important thing to think about. Without your income, everything else falls away. How will you pay your mortgage, food bills, utility bills or buy your children the things they need? You might think that you can rely on Statutory Sick Pay – but this is just £96.35 per week for up to 20 weeks
What is family income benefit?
Family income benefit provides a regular income, if you were to pass away. It’s an alternative to life insurance. Family income benefit is ideal when you have a young family where, rather than receiving a lump sum when you die, it would be better for those you leave behind to receive a steady income over time. You might arrange your policy to run until the children are 18 or until they leave further education.
Can you combine certain policies?
One option is to create a multi-plan. In an ideal world you would have income protection, a form of life cover and critical illness cover – because we never know what might happen.
But of course it does come down to your budget. What we normally say to clients is to allow 10% to 15% of what you’re paying in monthly mortgage payments for protection products. We will then explore what is important to you – because everybody’s different and has different needs.
According to what you want, we will have a discussion about how best to get you the optimal level of cover in line with the size of your mortgage, your income levels etc.
What about planning for inheritance tax?
With inheritance tax, we’re not financial advisers and can’t give specific advice. However, the threshold for inheritance tax is £325,000 – and with property prices going up this could mean that there might be an inheritance tax liability on your life insurance payout – which can total 40%. One option is to put insurance in place to cover any potential inheritance tax liability.
People work hard all their lives, and of course you want to protect that wealth for the people you leave behind. So inheritance tax planning is about making sure that in death, you’re not losing 40% in tax – especially as you have been paying tax all your life.
This again is something we can explore with you as part of the wider conversation about mortgage protection.
How can the Mortgage Brokerage help?
Get in touch with us and we’ll provide a free, no obligation consultation. We’ll look at your mortgage, explore life insurance and other cover to fit your needs today. If you have existing policies, we will review them and check they are doing the job that they’re supposed to be doing. Ultimately we’ll make sure you’re protecting your partner, your family and your wealth.
You cannot put a value on yourself – think about how much you pay for your car insurance and how much a car is worth. Just 15 minutes of your time will be enough to protect your family and your future.