Oddly, most people see themselves getting in a lifetime of debt as a positive thing, as we give it a fluffy name – mortgages.
Of course it is a good thing as it facilitates your ability to buy your first, or new home, and that really is a positive thing. So much time and effort goes into that, from online searching, viewings, offers and currently, beating the hordes to get the property you want!
Then comes the often time consuming and complicated area of getting the right mortgage. So naturally a lot of time and effort goes into getting into the property, however, as responsible financial advisors, we have a duty of care to ensure that you also stay in the property even if unforeseen events occur.
One of the largest risks to you losing your home, or at the very least, experiencing serious financial difficulties is being diagnosed with what we call a ‘Critical Illness’. For the purposes of this blog I am not going to get into the technicalities of this area, but I really want to focus on the high level principles, risks and outcomes as that is what is important. If you want to talk about this area in more detail, any of our advisors will happily talk you through the specifics of Critical Illness Cover, but for now, I just want to cover off the key points, which I see as:
What is Critical Illness Cover
As the name suggests, if you are diagnosed with a major illness, you then get a lump sum pay out from an insurer (which is also tax free). That money can go towards paying off your mortgage, replacing your income for a period of time, going for private treatment, or just being able to take time out financially to recover.
If you are so inclined, you can read the full 29 page guide from the ABI (Association of British Insures) here on what constitutes this type of cover, but as touched on above, the main things which are claimed on are:
- Heart Attack
- Multiple Sclerosis
For most insurers, these cover about 80-85% of claims they pay out each year (very scarily, children being diagnosed with a Critical Illness is often the 5th largest claim). They often cover 20-30 conditions in total, and upon diagnoses of this, the provider pays out the claim to the amount you set up in the first place.
This is typically set up in one of two ways:
- Level cover – which pays a set sum for a set period of time (so for example, £500k for 25 years as that covers your 25 year, £500k, interest only mortgage.)
- Decreasing cover – much as the above, but the amount tracks down in line with your repayment mortgage.
- You can set this up for most logical reasons, such as in line with a mortgage, to cover childcare costs or just peace of mind if your employer does not cover this.
Why is Critical Illness Cover important for a mortgage
The list above makes for frightening reading, so you can imagine if you do get diagnosed with one of these illnesses you are going to be off your feet for a good while. This is where looking very closely at your employee benefits is essential. Some employers offer:
- Sick pay
- This cover as a benefit
- Replacement income
- Private healthcare
- Nothing at all!
Once you have grasped what you get (if anything) from your employer, then you can identify any gaps, and start to look at putting cover in place to plug those gaps.
The harsh reality is that if your employer pays sick pay for 6 months (which is very generous) what happens in month 7 onwards? Your mortgage still needs paying, as with all your other bills etc, so at that point you are eating into your savings (if you have any), making tough financial choices, or being forced to return to work sooner than you would like, which can have a long term detrimental impact on your health.
Clearly none of this is ideal, hence why we recommend Critical Illness Cover for clients who do not already have cover in place or adequate cover via work. Even if you do have cover via your employer, it is worth thinking about what if you change jobs down the line? Putting something in place now will save you a lot of money in the long run.
But I don’t think I need it
The reality with any form is insurance is that you don’t want it until you need it. And you are really glad you have it when you do. Nothing is more true than this.
Just to use a widely known stat – 1 in 2 people will be diagnosed with Cancer before they die – anyone who has seen Stand Up To Cancer will know a lot more other unpleasant stats. In fact it never takes long for anyone to think of someone they know, or have heard of (as recent celebrity stories testify) who is a similar age to themselves, that were diagnosed with Cancer.
You can roll the dice, or ‘hope’ things are OK, but I go back to our core responsibility as a mortgage broker – we want to get you in your home and work with you until your mortgage is paid off. If something really bad like this happens, you will at best go backwards financially, worst case it can wipe you out.
It doesn’t have to be that way and hence why we have a moral obligation to discuss this with our clients.
If your options are
1) on top of the health issues you will be experiencing, you also have financial issues or
2) having a large lump sum of cash in the bank so you can focus on getting better –
we’d take option 2 all day long. Who wouldn’t?
As I say, this is just a high level summary of why we think it is so important that you have this cover in place when you have a mortgage. I know it is a heavy subject matter, but the reality is these days – if we don’t have this conversation with you, no-one else will – we can just put our heads in the sand and hope for the best, but why hope when you can plan? That is the view we take.
For a personalised conversation on this subject, please do get in contact as any of the team would be very happy to talk over what may, or may not, be required.