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Mortgage Protection Frequently Asked Questions
Richard Campo shares his expertise on Mortgage Protection, and why it is important to consider this vital product
When you put a major debt in place like a mortgage, we have a moral obligation to explain to a client what their options are. It’s something we’ve done as a business for quite a long time. We even give all our clients a free will. It’s just that important to think about all these things.
Why is mortgage protection so important?
I started my career in banking in 1999 and I do have first hand experiences of repossessions. The most common reason why a house was repossessed is always where someone got very seriously ill or died. But if you start talking to people like that they get very depressed – and you won’t have many friends at a dinner party.
Instead, when we take out a mortgage with a client, we ask what would you want to happen if something went wrong? What does your ideal scenario look like – and we start from there.
Maybe you want the property to go to your family or you want your children to go to a certain school. We think about the positive side of things – if something went wrong, what would you want to happen, and here’s how we can facilitate it.
That’s really our starting position. I’ve just talked through the realities of what happens without protection. You can’t get away from it. But it’s important to frame that conversation positively and not to scare people.
What is included in a life insurance policy and when should I get one?
Obviously, straight away – as soon as you get a mortgage. Many of our clients work for very good companies and have great benefits. We often ask for the contract or benefit statement and some clients absolutely are fully protected. But I’ll be honest, it’s about 1 in 10.
What people don’t think about is the other bits and pieces which we will expand on. Most companies give four-times-salary life cover. But you can get a mortgage for up to five and a half times your income. Your work benefits don’t include a bonus, whereas a mortgage provider will. So there can be some shortfalls even if you think you’re covered.
Everyone needs insurance for life cover and you need it as soon as the mortgage is in place. But not all life insurance is equal. Providers give different benefits and this is something we spend a great amount of time on. Some providers give you instant access to GPs immediately.
I’ve got two children – you try to get a GP appointment these days! With my insurance provider, I can book on an app to see someone that day. You can have a face-to-face video meeting with a qualified GP which is a great benefit. You can also access physiotherapy, rehabilitation services, mental health counselling, second medical opinions, ancillary payments… all sorts of stuff.
So don’t just look at the cheapest provider. You might find if you spend 50 pence more a month you get access to a lot of useful benefits.
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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.