Insurance World

It’s tempting to sit back and relax once you’ve moved into your new home – but hang on, have you made sure that you’re insured against all the risks that could stop you from paying your mortgage? Many things could go wrong and make it impossible for you to work, and in this article we go through each risk, and assess how important it is that you take that into account. If you are responsible for a family, then it is particularly important that you take heed of the following five issues:

What happens if interest rates increase and you can no longer afford your monthly repayments

What if you get made redundant

What happens if you become ill or have an accident and you can’t go to work

What if you have a serious accident or become critically ill, and you can never go back to work

What if you die and your family is left to cope with the outstanding mortgage

These are all questions that new homeowners have to ask, and find answers to. The good news is, the insurance industry have it covered, and there are policies out there that can provide peace of mind against all these possibilities.

On the subject of rising interest rates, you are unfortunate if you end up in the position where you can’t afford the repayments, because there are mortgages that help protect you from this. The fixed rate mortgage sets a rate for an agreed period of time in which your interest rate remains the same irrespective of the Bank of England base rate. A capped mortgage allows your payments to fluctuate, but there will be an agreed rate at which the interest rate that you pay will be capped. Capped mortgages protect you for an average of 3-5 years, and then, as with the fixed rate mortgage, it will revert to the standard variable rate.

55% of all new mortgages are fixed rate deals, so they are by far the most popular type of mortgage. The capped mortgage is less popular because it still retains an element of risk, and they can be more expensive at the outset, which deters a lot of potential customers. At the end of the protected period, for both types of mortgage, you can choose to re-mortgage with another company without paying any penalties. It’s a good idea to keep your eye on the available offers as the end of the protected period approaches, because there are likely to better deals out there. The market is so competitive that new offers are always arising, and they are particularly focused on attracting re-mortgaging customers. Ask a mortgage broker to see what else is out there, as they have all the latest information to hand. You don’t have to commit yourself to anything.

If you want to insure yourself against the possibility of losing your job, then you need Mortgage Payment Protection Insurance. However it’s important to be aware that this type of insurance is designed to protect those that are made redundant, not those that resign or are dismissed. We found quotes on the Internet for around Ј2.45 per Ј100 of monthly mortgage payment. Once you stop working, the insurance will start paying after 30 days and then for a maximum of 12 months. You can buy this insurance through your mortgage lender but we don’t recommend it, they always charge more than their internet rivals.

You also have the choice of covering your mortgage payments due to sickness or illness keeping you from working. However we recommend checking with your employer first to see if they have a sickness payment plan in place. Some companies will give their employees full pay for six months for accident or illness. Even in this case, it’s still worth getting the insurance because you could be off work for more than six months. It would be very difficult to meet the mortgage repayments on statutory sickness benefits alone. This type of insurance also costs Ј2.45 per Ј100 of monthly mortgage payment, but you can combine it with unemployment cover and it’s Ј3.95 per month, which is less than buying the two separately. Both will cover you for a maximum of 12 months, so you really need to consider what would happen if a serious accident or illness left you permanently unable to work.

The insurance industry estimates that 1/5 of men and 1/6 of women have to permanently leave work before retirement age because of a serious illness or accident. Think about it, if you have a heart attack at the age of 45 then you are unlikely to go back to work again. With a family to support, this could be disastrous.

In this case, then you would need Critical illness insurance – it covers the outstanding mortgage in full if you are unable to work again. Look out for “total and permanent disability” cover – it is essential that it is included in the policy as it specifically covers the possibility of you not working again due to accident.

There are a few options to look out for with Critical Illness Insurance – for example you need “decreasing cover” if you have a repayment mortgage. This is so the value of the payout decreases in line with the value of your outstanding mortgage. It is also cheaper than the alternative: “level cover”. You need this if you have an interest only mortgage because the outstanding mortgage balance will remain the same.

Make sure you know all the facts about the insurance you buy, because there will be times that you can’t make a claim. For example, Critical illness Insurance requires you to survive for a period following an accident or diagnosis of a critical illness, usually 28 days but sometimes 14 days. If you die before that time, then no claim can be made on your policy.

To cover the possibility of you dying within 28 days, then you need mortgage life insurance. Many lenders require you to set up a mortgage life insurance policy as a condition of you taking out the mortgage. You don’t have to buy it through the lender however, in fact it will be a lot cheaper if you don’t. Also if you live alone and do not have to support a family, you don’t necessarily need this type of insurance as the lender will recoup the money for the outstanding mortgage by selling off the property.

Mortgage Life insurance is the most popular kind of mortgage protection, and like critical illness insurance, you can choose between “decreasing cover” and “level cover” depending on whether you have a repayment or an interest only mortgage.

There’s no denying that buying all these insurance policies to protect your mortgage will cost, but there are a few ways to get the best value. Firstly, if you combine accident and illness with unemployment cover then you will save around 20%, compared to buying them separately. Some insurance companies may refer to this as “unemployment and disability” cover. Critical illness and mortgage life insurance also become cheaper if you combine the two, and we predict an average saving of 20-25%.

And don’t forget the most obvious way to save money – shop around. Your lender will quote you on these insurances, and may even give you the impression that you have to buy your insurance through them, but you are free to buy it from any company you please. So it had might as well be the cheapest! Go online for the best deals, even better – contact a specialist life insurance broker and ask them to find the best deals for you. They can do all the legwork and, if you’re not impressed, then you don’t have to buy through them. The advantage they have on price is due to the hot competition on the Internet, especially for insurance. Brokers offer better deals by slashing their commission and giving you a further discount. Search using any of the following terms: “cheap life insurance”, “life insurance”, “life insurance quotes” or “Mortgage Protection Insurance”, and you will come across a number of cost-effective options.

The other advantage to using a broker is that you have full access to their expert advice. When faced with the option of getting a “Guaranteed Premium” or a “Reviewable Premium” for your critical illness insurance, will you know what it means? Even if you do, which one is best? That’s when a life insurance adviser is worth their weight in gold. So we recommend picking up the phone and talking to an expert in person, it doesn’t take long and it guarantees you getting it right first time.

The bottom line: peace of mind comes at a price – but it doesn’t have to be expensive!

More and more people are buying life insurance online and the numbers seem to be doubling every two years. The reasons are clear. Prices are lower on the Internet and life insurance is fundamentally a simple insurance product.

Despite the underlying simplicity of life insurance, most web sites channel their online clients through a telephone based help and advice service manned by experienced personnel. They represent your safety net so if a little technical knowledge is called for, help is at hand.

But it’s always a good idea to have a few Top Tips in your back pocket when you’re shopping online for life insurance. They’ll help you ask the right questions and find the best policy.

1. Always have your Life Insurance policy “Written in Trust”.

This means that in the event of a claim, the money goes directly and immediately to the person(s) you nominate when you first take the policy out. It also avoids all possibility of your estate having to pay Inheritance Tax on the proceeds of your policy and that could represent a 40% tax saving !

All you have to do is tell the online brokerage organising your policy that you want your policy “Written in Trust” and the names of the people who the life insurance company pay in the event of a claim. They will then sort it all out for you. The extra good news is that this service is invariably free of charge. So it’s a win win situation and there aren’t many of those around these days !

2. In the early years a Reviewable Life Insurance Policy will be cheaper but a Guaranteed Policy will work out a better buy in the longer term.

With a “Guaranteed Policy” the insurance company guarantees never to increase your policy’s premium.

With a “Reviewable Policy” you agree that your insurance company can review the cost of your policy at regular intervals. But don’t be kidded – in our experience a “review” is just another word for a price increase. After all, who’s ever heard of an insurance company passing up a chance to charge you more! The review intervals are usually between 2 to 5 years but this does vary between insurance companies. You will find the details of the review intervals on the documents sent to you before you accept the insurance – these are called The Key Features Documents.

So, comparing otherwise like for like policies, in the early years the premiums for a “Reviewable Policy” will undoubtedly be lower than the premiums for a “Guaranteed Policy”. Thereafter, the premiums for a Reviewable Policy increase eventually catching up with and overtaking, the premium for a “Guaranteed Policy”.

In our experience, you can expect the monthly premiums for a Reviewable Policy to exceed those of a Guaranteed policy in about 7 to 10 years and then within the following 10 years, more than double again. If your budget is currently tight then by all means choose a Reviewable Policy - after all your salary may increase in coming years and ease the strain. On the other hand, if the premiums for a Guaranteed Policy are affordable, we think they represent your best buy.

A footnote. Many insurance companies have stopped offering “Guaranteed” rates for standalone critical illness insurance policies. This because they have experienced much higher claim rates than they initially expected. However, you may still find a Guaranteed life insurance policy that also provides critical illness cover. As we have explained, “Guaranteed” rates are especially good value and if you can get a quote for a Guaranteed life policy that includes critical illness cover, you may have a real bargain.

3. Thinking about a Joint Life Insurance Policy?

A Joint Life Insurance policy is usually written on a first death basis. This means that the policy will pay out on the death of the first policyholder, subject to the policy being in force at the time. This leaves the second person uninsured and older. Older people can struggle to get life insurance at an affordable premium, so rather than a Joint Policy consider taking out separate policies now. Overall it will work out a little dearer - but you get twice the cover and double the peace of mind.

4. Taking out a Life Insurance Policy? Now would be an ideal time to include Critical Illness cover.

Are you likely to need Critical Illness Insurance in the future? Yes? Then consider adding it now to the life insurance policy you’re arranging. Why? There are three reasons.

Firstly, a Life Insurance policy combined with Critical Illness cover will work out significantly cheaper than buying two separate policies. Secondly, as we have already explained in the footnote to Tip 2, you may be able to buy a combined Life and Critical Illness policy with a guaranteed premium. That could be a real bargain. Finally, premiums for critical illness cover increase rapidly as you get older – so the sooner you take it out, the cheaper it will be.

5. Don’t confuse Terminal Illness cover with Critical Illness cover.

There’s world of difference between Terminal Illness and Critical Illness cover so it’s important to understand the difference.

Terminal Illness cover pays out the insured lump sum if a Medical Doctor diagnoses you with an illness from which the Doctor expects you to die within 12 months. Most good life policies automatically include Terminal Illness cover at no extra cost. It’s basically an early, and welcome policy payout.

A Critical Illness policy pays out the insured lump sum if you are diagnosed with one of a wide range chronic illness and there is no life expectancy criteria. Indeed, with many of the insured illnesses you could expect to survive for many years. For example: certain cancers, heart disease, stroke, multiple sclerosis, loss of speech, sight or hearing, onset of Parkinsons or Alzheimers disease, third degree burns etc. Say you were an engineer aged 40 and you lost your sight. A Critical Illness policy would pay out immediately and that money could well be vital in helping you and your family through many difficult financial years ahead. If you just had Terminal Illness cover there’d be no chance of a payout.

So as you can see, Critical Illness cover is far more comprehensive than simple Terminal Illness cover and for that reason critical illness cover always costs you extra.