Now that you have purchased your new home, paid a fortune for the legal fees, surveys and the stamp duty, the last thing you want to think about is incurring any other costs, on top of what you already have to spend.
While it is prudent to keep your costs low on certain things, it is not prudent to cut back on important things like insurance. The insurance in this case is known as:
- Mortgage protection insurance;
- Mortgage payment protection insurance;
- Mortgage insurance protection plan;
- Accident, sickness and unemployment cover, among others.
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In such an eventuality it may be unlikely that state benefits will be able to help you as they have stringent rules on when such a benefit is likely to be payable and for how long.
It is likely that your mortgage lender will offer you a mortgage protection insurance policy. Chances are that the way it will be presented to you, is that one policy will cover and will suit everyone's needs. However, key information is not taken into account, for example your age, gender or occupation, and it will pay your mortgage and its associated costs, such as home insurance, for 12 months if you lose your job, suffer an illness or accident that stops you working.
Mortgage protection insurance in the UK essentially protects your mortgage in the event of sickness, unemployment or accidents, leaving you unable to work. No one knows what is around the corner. Anything can happen at any time as none of us are untouchable.
Your lender may not offer you the most competitive deal. Some lenders may not provide you with essential information about such policies. One of the biggest failings of lenders offering mortgage protection insurance is not asking about any pre-existing medical conditions as most companies will not pay out under these circumstances.
Some insurance terms
- The benefit period - is the length of time you can claim monthly payments for. These vary from policy to policy. You can select the time period you want to be covered for (1 year, 2 years etc) but the longer you want the cover for, the more expensive the premiums will be.
- An exclusion period or an excess period - this is the time you have to wait to start receiving benefits from the policy after you become ill, had an accident or become unemployed. This can vary from having no exclusion period to 30, 60 or 90 days. In some instances, this can be even longer.
- 'Back to day one cover' - means that the insurer will backdate your payment from the first day you stopped working.
Before committing yourself to a particular provider it is important to read the exclusions on the policy and to compare it with other policies. Look out for policies that offer 'back to day one cover'. Most mortgage payment insurance companies do not pay unless you have been out of work for at least 30 days.
Check to see what benefits you have from your employer. They may already provide you with accident, sickness and unemployment cover. If this is the case, duplicating cover with another provider in unnecessary. Instead you may be able to opt out of the unemployment part of the cover as some providers sell components mortgage protection insurance separately.
Rather than focusing too much on the price of the policy, concentrate also on what it contains as it may not be the right one for you.
Mortgage Life Insurance
This is another type of mortgage protection insurance. It differs to the type of policies described above because it pays out should you die before paying off your mortgage. It is a type of life insurance that will pay off the remainder of your mortgage, meaning that your spouse and any dependants will still have their home.
As the policy is tied to your mortgage, the sum covered reduces as the mortgage is repaid. This is a cheaper life insurance option compared to a policy that pays out a lump sum that does not change.
How Does Mortgage Life Insurance Work?
There are two types of mortgage life insurance:
- Decreasing term life cover - this is the preferred option for many people, it pays the outstanding balance of your mortgage. The way it works is as the mortgage debt reduces over time, so does the amount that is paid out on death, leaving your dependants with enough money to settle what is owed on the mortgage. This is usually a cheaper policy.
- Level term cover - pays out a lump sum if you die within a set term, for example your dependants will received £300,000 if you die within the 20-year term. The money can be used for living costs as well as paying off the mortgage. This policy is usually more expensive as it pays out a set lump sum during the mortgage term. This type of cover is better suited to paying off an interest-only mortgage.
How Much Cover Do I Need?
This may seem an obvious point to make but make sure whichever policy you take out will be enough to cover your mortgage. When taking out mortgage life cover ensure the sum will be sufficient to clear the mortgage debt if you die during the mortgage term.
As with all types of insurance, you need to shop around to find a good deal. Do some research to see how these policies vary, you will be surprised. Don't take someone's word for it find out for yourself!