Your mortgage is likely to be the biggest expense you will face in life, but what happens if you can no longer pay it? Here are the types of insurance that can help you pay your mortgage.
What do you need?
There are four types of insurance you should consider when taking out a mortgage:
- Buildings insurance: To cover the rebuild costs if something happens to your home.
- Critical illness cover: To help cover the cost of paying off your mortgage if you get diagnosed with a life changing condition.
- Income protection: To help cover your mortgage payments each month if you are unable to work due to an accident, sickness or redundancy.
This type of insurance is compulsory if you have a mortgage, and could save you a fortune if something damages your home, like a fire or flood.
Without building insurance, you would need to foot the bill of the rebuild of your home, and pay your mortgage at the same time.
What is covered?
It protects you against damage caused by:
- Weather, including storms and flooding
- Water or oil leaking from pipes or heating systems
- Fire, explosion, lightning, earthquake and smoke
- Subsidence, heave and landslip
- Theft, attempted theft and vandalism
- Falling trees, branches and TV aerials
- Frost damage to internal water pipes
There are other cover benefits that you should look out for when looking for a buildings insurance policy:
Trace and access: This covers the cost of removing and replacing any part of your buildings in order to find and repair a leak.
Loss of keys: If you lose your keys you can claim for the cost of replacing locks on the outside of your home or to any alarm systems or safes inside your property.
- Emergency access: This can cover the cost of any damage to your property caused by emergency services, for example breaking into your home.
If it is unsafe to stay in your home, following flooding for example, your insurer will cover the cost of alternative accommodation until it is ready to live in again.
Most policies will give you comparable alternative accommodation, so if you live in a three bedroom semi-detached home you should be covered for a similar property.
Check the level of cover carefully, because if your home is badly damaged you may not be able to return for over a year.
Some insurers will cover up to a percentage of the sum insured, for example, 20%, or they will set a claim limit which can range from £12,500 to £80,000 depending on the policy.
This means any accidental damage caused to your buildings will be covered under your policy.
Accidental damage is usually defined as any sudden and unintentional physical damage that is caused to your property unexpectedly.
The cost of accidental damage, for example putting your foot through the ceiling when in the loft, could cost hundreds of pounds to repair, so it is worth making sure this is covered before you buy a policy.
Most insurers offer extra cover options you can add to your policy for an extra cost:
Legal expenses cover: This can cover legal costs you face for things like property disputes, faulty goods or services and employment claims. You will also have access to a 24 hour legal advice helpline you can call for guidance.
Home emergency cover: This covers the cost of calling out a tradesperson to prevent an emergency causing damage to your property, for example fixing a burst pipe.
Are there any exclusions?
All buildings insurance policies have a list of things you cannot claim for, known as policy exclusions.
Common exclusions include:
- General wear and tear of your property
- Frost damage to outside pipes and brickwork
- Storm damage to things like gates, fences and plants
- Deliberate damage caused by you or anyone living in your home
- Damage caused by insects, birds or other pests
Most policies will not cover your property if you have not stayed there for an extended period, usually 30 or 60 days.
How much cover do you need?
There are three main ways insurers work out how much cover you need for your property:
Blanket cover: Some insurers set a standard claim limit for their policies, regardless of how much your house would cost to rebuild. This is usually a high amount, for example £1 million or unlimited, so you should be covered for any repairs you need.
Bedroom rated insurance: Some insurers base how much cover your property needs by looking at the number of bedrooms you have. For example, if you have a two bedroom house, they may give you up to £250,000 of buildings insurance cover.
- Rebuild cost: Some policies set the cover level at the cost of rebuilding your home from scratch. You work this out by asking a chartered surveyor to assess your property or using the Association of British Insurers (ABI) rebuild calculator*.
* This calculator is free to use, but you will need to sign up to use it.
Getting a quote
When you apply for a buildings insurance quote the insurer will ask you for information about your property so they can work out how much your cover will cost.
Before you start looking for a policy make sure you know:
- The year your home was built
- How much of your roof is flat
- What your home is made of
- If you live on a floodplain
- If your home is listed
- What alarms you have
- Has it suffered subsidence
- Are any tall trees near your home
If your home is listed, has a flat roof, or is made of non standard materials you may need a specialist home insurance policy.
A life insurance policy could pay off your mortgage if you die during the term of the policy. There are two types you could consider:
- Level term life insurance: This would pay out an amount chosen by you, if you die during the term of the policy.
- Decreasing term life insurance: This costs less than a level term policy because the payout reduces over time. You could set up this type of policy to reduce its payout at the same rate as your mortgage balance each month.
What is it?
Life insurance pays out a cash lump sum if you die during the term of your policy.
You can apply for most policies when you turn 18, but some have different age restrictions.
When comparing life insurance policies, you can choose:
- How much a policy will pay out
- How long the policy lasts for
- Who the payout goes to if you die, e.g. your spouse
How does it work?
Before you take out a life insurance policy, you need to get quotes from insurers.
Most insurers let you choose your policy based on the payout amount you want, or the amount you can afford to pay each month, for example:
If you choose a payout amount, your monthly premium will be affected. The higher the payout, the more you pay monthly.
- If you choose your monthly premium, your payout amount will be affected. The lower your monthly premium, the less you get as a payout.
What types are there?
There are three main types of life insurance you could apply for:
Term life insurance: You choose a term and an amount of cover, then pay a premium until the policy ends. There are two types of term insurance, level term and decreasing term.
Whole of life insurance: You choose an amount of cover, and the policy will pay out whenever you die. You have to pay your premiums until you die, or you could invalidate your policy and get no payout.
Over 50s life insurance: You can only apply if you are over the age of 50. You choose an amount of cover and pay a set premium each month. Some policies have age limitation for claims, but most do not.
Is it worth it?
It can be, some policies start from £5 a month. However, whether it is worth it will depend on your personal circumstances:
If you have a mortgage: A life insurance policy could offer a lump sum of money to clear your mortgage, taking the financial stress off the ones you leave behind.
If you have children: You may want to leave your children a sum of money to help them with their finances, or to go towards their education, e.g. university fees.
There are many things to consider when weighing up the true value of a life insurance policy though:
- The higher the amount of cover, the more it will cost you monthly
- The older you are, the more expensive your policy is likely to cost
- If you smoke, you may struggle to find a policy, and the ones you find will cost more
Critical illness cover
This type of insurance pays out a lump sum if you get diagnosed with a serious condition, like cancer or if you suffer a stroke.
Each policy has a list of conditions it covers, and a list of exclusions, so check before you buy.
There are three types of critical illness cover:
Increasing cover: The payout amount and premiums rise with the rate of inflation each year.
Level cover: The payout and premiums stay the same throughout the policy.
Decreasing cover: Premiums are usually lower compared to level cover, but the payout reduces each month. You can use this to follow your mortgage as it is repaid.
Some insurers let you add critical illness cover to a life insurance policy when you apply.
You do not usually get a better deal if you buy the two together, so shop around for both to find the best cover for the cheapest price.
What is it?
Critical illness cover is a type of insurance policy that pays out if you get a serious illness, disease or disability.
The pay out can help support you during a life changing situation, by giving you money to use towards your outgoings each month, for example, rent/mortgage and bills.
A critical illness policy will not pay out if you die suddenly. If you want a payout for this reason then look for a life insurance policy instead.
What does it cover?
The cover depends on the policy you take out, but the conditions covered must include:
Insurance companies may cover other conditions, such as:
- Aorta graft surgery
- Benign brain tumour
- Coronary artery by-pass surgery
- Heart valve replacement or repair
- Kidney failure
- Loss of hand or foot
- Loss of speech
- Major organ transplant
- Motor neurone disease
- Multiple sclerosis
- Paralysis of limbs
- Parkinson’s disease
- Third degree burns
- Traumatic brain injury
- Total Permanent Disability
However, most policies specify the severity of the conditions they cover, e.g. some policies only cover a stroke that gave you resulting symptoms lasting for at least 24 hours.
The number of conditions you can get cover for varies depending on the insurer you choose. For example, some only cover three conditions, but others may cover over 100.
If you want cover for a certain condition, look for a policy that covers it before you apply.
How does it work?
When you apply for critical illness cover, you need to choose:
How much cover you want
How long you want the policy to last, e.g. 30 years
Each insurer offers a limit on how much you can claim, with some offering up to £25,000, and others offering millions.
The amount of cover you choose will affect your monthly premiums, which you pay throughout the term of a critical illness policy.
Your age also affects your monthly payments; the older you are the more expensive they will be. Some insurers do not offer cover if you are over a certain age, e.g. 59.
Most policies offer fixed monthly payments throughout the term, however there are two exceptions:
Increasing cover: Your premiums, and the amount you can claim, rises in line with inflation, which is measured by the Consumer Prices Index (CPI).
Decreasing cover: Your premiums are fixed, but the amount you can claim reduces. These are commonly used in line with a repayment loan, like a mortgage.
Who can get it?
To be eligible for most critical illness policies, you should be:
Over 18 years old
Under a policy’s upper age limit when you apply, e.g. under 60
Not diagnosed with an illness you want cover for
The eligibility criteria may differ depending on the insurer you choose.
If you smoke, or have ever smoked, your policy is likely to be more expensive due to your increased chance of developing a serious medical condition in life.
Most critical illness policies only cover you, but there are policies that cover more than one person:
- Joint policy: This would cover you and another person, e.g. your partner
- Family policy: This would cover you, you partner and your children
If you are not sure what type of policy to choose, speak to us. An adviser can give you guidance and recommend a policy.
If you become ill, have an accident or even become redundant, an income protection policy could pay you an income until you can work again.
These policies can cover you up to a set percentage of your income, e.g. 65%, or up to a set monthly amount, e.g. £2,000.
You could find a policy that lasts for just a year, or up to your retirement date. The longer the policy, the more expensive it is.
What is it?
Income protection is a type of insurance that pays you an income if you have to stop working, due to illness or injury for example. When you apply for a policy, you need to think about:
The payout: This is the income you will get paid if you claim
The term: This is the length of your policy
The premium: This is how much you pay each month to keep the policy running
Depending on the policy you choose, income protection could cover you against:
Accidents, e.g. if you are injured in a car accident and cannot return to work
Sickness, e.g. if you get diagnosed with a serious illness and cannot work
- Unemployment, e.g. if you become redundant, not when you quit your job
How does it work?
When you apply for income protection, you can usually choose either:
- Level cover: Your payout and premiums are fixed for the term of the policy
- Inflation linked cover: Your payout and premiums go up each year in line with inflation
There are also two types of insurance premium you could pay, depending on the insurer
Guaranteed premiums: You pay a fixed premium for the policy’s term. However, if you have inflation linked cover, your premium and payout will be guaranteed to increase each year until the policy ends.
Reviewable premiums: You have fixed premiums for a set term, such as 15 years, then you can review your policy and adjust the income payout. If you review your cover, it could affect your premiums.
Who can get it?
You can apply for income protection if:
You work in full time employment
You work in part time employment
You are self employed
You can also apply if you have a pre-existing medical condition, but insurers may charge you more, or exclude any claims related to your condition.
Can you get joint cover?
No, because each policy is created based on an individuals circumstances. If you need income protection for two people, you can apply for a separate policy each.
Do you need it?
If you can afford to replace your income if you were out of work, you may not need it, but if you cannot then you should consider getting an income protection policy.
Can you claim any state benefits?
You may qualify for some government financial support, even if you have an income protection policy.
However, the amount you get paid as an income from your policy may get reduced if you do receive state benefits.
Find out more about the benefits you could apply for here.
What cover do you need?
To decide what cover you need, think about:
- How long you want a policy to pay you an income for
- The percentage of your income you want covered
How much cover do you need?
Most insurers let you specify an amount or choose a percentage of your existing annual income, for example 65% of your yearly salary.
Most insurers have an upper limit on the amount you can cover, for example, up to 65% of your income or £40,000, whichever is higher.
To help you decide how much income protection to choose, write a budget to work out which outgoings you need to cover, for example:
|Living costs||Monthly amount|
|Utilities, e.g. electricity, broadband||£200|
|Insurances, e.g. car, home||£100|
|Minimum income needed||£1,700|
What term should you choose?
There are two types of policy terms:
Short term: You only get an income paid to you for a set term, such as six or 12 months.
Long term: You get an income paid to you for as long as the policy allows, usually up to your retirement age or a set term like 40 years.
Short term policies are usually cheaper than long term policies because the insurer will only ever need to pay out an income for a limited time.
However, if you were off work for a longer period of time, a short term policy would not cover your income when you really need it.
What is a deferred period?
It is the time between making a claim and when you start getting an income paid to you. You can choose to have a deferred period of six or 12 months, sometimes longer.
The longer the deferred period you choose, the cheaper your premiums are likely to be.
Ask your employer how long they will pay you if you could not work due to illness or injury. If you get six months full pay, for example, you could choose a six month deferred period.
This would mean:
- You continue to get an income if you cannot return to work after six months
- Your premiums are likely to be cheaper than a policy that pays out straightaway
How much does it cost?
An insurer will base the cost of your monthly premiums on several factors:
Age: The younger you are, the cheaper your policy will be monthly. You can apply from 18 years old, with most insurers letting you apply up to the age of 60.
Health: You complete a medical questionnaire when you apply, and confirm if you smoke or have ever smoked. The healthier you are, the cheaper your premiums.
Income needed: This could either be up to a set amount or a percentage of your annual income. The higher the amount, the more expensive your premiums will be.
Length of cover: The shorter the term you choose, the cheaper it will be. This is because the insurer has a shorter window of time when they could pay out.
Deferred period: You can reduce your monthly premiums by choosing a deferred period. Most insurers let you defer your payout by six or 12 months.
When does it pay out?
When you set up your policy you can choose to have your income paid out:
Straight after claiming: You get an income paid as soon as you are unable to work. This is usually the most expensive option.
After a set term: Wait a fixed period after claiming for your payout to start, e.g. 6 months. This could suit you if your employer pays you for the first 6 months off work.
Most income protection policies limit how long you can get an income for, such as up to the age of 70.
If you only want an income paid out for a fixed period, like 12 months, you could choose a short term income protection (STIP) policy instead as a cheaper alternative.
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