Mortgage Protection

Do I need critical illness cover? What is this and how does it differ from life insurance?

Both provide you with a lump sum payment. So if you were to die, your family receives a sum of cash. And if you get a critical illness it’s the same thing. You might decide you need £250,000 of cover and that’s what the policy pays out. 

The difference with critical illness cover is that instead of you dying, it pays out if you develop one of 22 conditions as set by the Association of British Insurers. That includes the big four: heart attack, cancer, stroke and multiple sclerosis, which make up about 85% of all claims.

Different providers will cover more things. Some cover 30 to 40 conditions and there’s one provider covering 140 illnesses. Some providers also give what’s called additional payments. This is really sad, but the fifth or sixth highest claims are on children’s critical illness cover. The insurers will make either a partial or full payment depending on the policy. 

It’s so interesting how this cover came about. A guy called Marius Barnard was a South African cardiovascular surgeon and in fact his brother performed the first ever heart transplant. He started saving more and more people’s lives but realised that people were often falling into financial difficulty after successful surgery. 

So this cover is really for after the event. Any one of those serious illnesses could knock you off your feet for months or years. If your work doesn’t pay out for long, could you run out of money? Or would you want to choose private healthcare?

Again, let’s frame it a positive way. If you get some horrific news, it would certainly make it a little easier if you’re given £250,000 to get the best medical treatment in the world.

What is income protection and how does it work?

If you’re signed off by a doctor and told that you can’t do your job, this insurance will pay you a replacement income. One technical thing to be aware of is the ‘deferred period’. You can choose for the money to start on day one, or typically three to six months down the line if you haven’t returned back to work. 

Your replacement income tends to be around 50% to 60% of your gross annual pay, because there’s no tax. This is the most claimed-on policy. 

Another depressing statistic is that one in two people will get cancer in their lifetimes, and the probability of getting it during a mortgage is around 20% to 25% depending on the individual.

That’s why critical illness cover is more expensive than income protection because it often pays for a defined shorter period. It’s a really important insurance to look at because it covers your finances so you can focus on getting back to work. Again there are ancillary benefits such as physiotherapy. This is also the only cover that actually pays out for mental health issues. If you’re signed off with stress or anxiety you’ll receive that income. 

Interestingly, once you have a mortgage you need income to keep repaying it. Yet people usually focus on life cover first – even though it has the lowest chance of happening for most clients. There’s a 5% to 10% chance of you dying during the mortgage term. Yet around 60% of people claim on critical illness cover. 

What is family income benefit? 

It’s another form of life cover. I’ll use myself as an example. I’ve got two daughters and my youngest is five, so if she wants to go to university and then study a PhD she’s going to be financially dependent until she’s say 25. So I’d put family income benefit in for 20 years and work out what the cover would pay out per year. 

Let’s say I want to set it at £20,000 per year per child. It’s really cheap, really effective and means that if you’re not around, the plans for your family can carry on. 

Can you combine policies? 

Yes, you can combine them with something called a menu policy and it’s something that works very well. As advisors we say if you’re taking more than one cover it can actually work out cheaper to stay with one provider.

We will always look at whether it’s cheaper to split the policies out but you can absolutely have it with one provider. For many people it’s the most suitable thing to do.

How much should I budget for mortgage protection? 

Ultimately, it’s about what you can afford. We do give clients guidance, though. Our starting point is to look at 10% of your mortgage payment. If you went to cover all the things we just spoke about, and your mortgage is £2,500 a month, would £250 a month be affordable? 

Here we are in September 2022 with a cost of living crisis and inflation at over 10 percent. People are feeling the squeeze. I would always ask you to look at the cost of not doing this. If you don’t protect your mortgage, and you miss some payments you might never get a low mortgage rate again. If your home was repossessed, could you ever get back into the market?

The benefits far outweigh the downsides. It’s just getting it in a place that’s sensible for you. The other dynamic is that the younger you are, the cheaper it is. If you’re a First Time Buyer or have a young family, please get something set up because every time you come to review it gets more expensive. You could ignore this problem but It doesn’t go away. It just gets more expensive.

There may be a fee for mortgage advice, however, the precise amount will depend on your circumstances. If a fee is charged, a typical amount is £495.