Mortgage protection is a must for most people. Whether you have a partner, are married or have children giving some thought to what would happen should events take a turn for the worst is not something any of us wished to dwell on. The problem is in the unlikely event we need the peace of mind our families will be well looked after as the loss or illness of a loved one can have devastating effects both emotionally and financially.
Should the worst happen, planning just in case means your loved ones can get on with grieving rather than worrying about money. You can use protection to secure the family home or provide some additional capital to help your survivors cope in these devastating circumstances.
There are many types of cover available depending on specific needs so we will try and explain below:
Basically a policy set up to provide a lump sum or regular income upon our death. It may be used to clear a mortgage or debts for example removing the need to make repayments and securing the family property. These policies mean the financial pressure on family or surviving partner may be eased and securing the family property permanently.
Terminal illness cover
Usually included in most life insurance plans, these aim to pay a lump sum should you be diagnosed with life expectancy of less than maybe 12 or 18 months. This can be used to secure the family home for loved ones and again remove the money worries at an extremely difficult time.
Critical illness cover
Essentially a policy set up to provide a lump sum or regular income for yourself. With a “life only” policy, you will not be here so will never benefit but with critical illness policies, they pay a lump sum to you. If you were to suffer a specific critical illness (usually more serious conditions such as heart attack or serious cancers), they will pay a lump sum to clear your mortgage removing the need to maintain payments to lenders and securing your home during a period of great uncertainty. Importantly these policies pay upon diagnosis, no matter what the prognosis may be.
Where your mortgage is interest only, you are maintaining interest payments and the amount borrowed remains constant, therefore you want the sum assured to remain fixed in line with the debt. Where the premiums are maintained, a level term policy guarantees a fixed amount will be paid ensuring clearance of your mortgage in the event of your death.
Specifically designed for repayment mortgages where your repayments are made up of payments of capital and interest. Over time, the amount of your debt reduces and so does the sum assured of a decreasing term policy. They are designed to insure a maximum interest rate (ie: as long as your mortgage interest rate never exceeds 8% for example) and will pay a steadily reducing amount to clear your remaining mortgage balance in the event of your death.
ASU (Accident, Sickness and unemployment)
Whereas the policies above are designed to pay lump sums, ASU plans pay a regular income, usually for a fixed period of time. In other words let’s say your household bills are £1,000 per month, an ASU policy will pay this income to you in the event you are unable to work though accident or illness or even made redundant. Crucially these policies are usually shorter term and will only pay for a maximum period such as 1 or 2 years only. Designed to relieve shorter term financial pressures allowing you to recover and return to work.
PHI (Permanent Health Insurance)
Similar to an ASU policy (but excluding redundancy) in the event of accident or sickness, the monthly sum assured is paid until the end of a specified term, for example age 65. Therefore PHI plans are permanent and once in payment will not be stopped unless you return to work and recover. They are not just paid for a shorter periods of time and can pay out many thousands of pounds. Crucially PHI policies can only be arranged for a % of pre incapacity earnings perhaps 60% with the idea being this provides some motivation to return to work.