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5 ways to protect your mortgage

Critical Illness, Income Protection, Life Assurance, Mortgages, Protection
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5 ways to protect your mortgage

After months of hard work you are about to buy your first home and as a result are about to take on a considerable amount of debt! You’ve probably realised by now that if something happens to you or your partner that affects your ability to pay the mortgage, you could be up a certain creek without the proverbial paddle.

Now is not the time to panic, in this blog I will cover 5 of the most common options to help you make an informed decision about which protection risks to prioritise.

How to protect your mortgage

So what could go wrong?

Well…. you, your partner or both of you could:

  • Die
  • Be diagnosed with a Critical Illness
  • Be unable to work due to illness or accident

I’m going to assume that as you are reading this post, you have accepted that you are not invincible and that unfortunately these things could happen to you.  If this is not then give yourself a good shake and start reading from the top. Part of the reason I became a Financial Planner & Mortgage Adviser was down to my experience as a First Time Buyer.  My wife and I are degree educated and we were both working in good jobs at the time. We spoke to an Independent Mortgage Adviser about our mortgage options and we were bamboozled by all the jargon! In this post I hope to use my professional and personal experience to shed some light on the financial jargon surrounding protection.  This should enable you to be better informed about what protection you might need in your life.

The tools of the trade

I’m only going to cover the simplest forms of protection in this post as there are many options, bells and whistles that can be added which would turn this post into an essay. So let’s take a few of the more common protection policies and explain what they can be used for and how they work.

5 common protections policies and when they will pay out

 

Table 1
Policy Type Pays out on
Death Diagnosis of a listed Critical Illness Inability to work due to illness or accident
Decreasing Term Assurance
Level Term Assurance
Critical Illness Cover
Family Income Benefit
Permanent Health Insurance / Income Protection

5 common protections policies and how they pay out their benefits

 

Table 2
Policy Type Pays out a
Lump Sum Regular Income
Decreasing Term Assurance
Level Term Assurance
Critical Illness Cover
Family Income Benefit
Permanent Health Insurance / Income Protection
 – Standard Cover
 – Available as an option
 

So what’s the difference?

Life Assurance & Critical Illness

In a Decreasing Term Assurance (DTA) policy the amount you are insured for reduces each year as shown in the graph below. With a Level term Assurance (LTA) the amount you are insured for stays the same throughout. These policies are the most commonly used to pay off a mortgage with the lump sum benefit. Decreasing versus Level Term Assurance   A Family Income Benefit (FIB) is a policy which pays out a monthly or annual income which could be used to cover your monthly payments throughout the term of the policy. All of the above can come with various additional features such as Critical Illness Cover (CIC) which can make them very flexible and useful.  Standalone CIC policies are also available which with either a decreasing or level sum assured.

Income Protection

Permanent Health Insurance (PHI) policy, sometimes known as Income Protection, pays out a set percentage of your income to replace your earnings should you become unable to work due to illness or injury.

What will this all cost?

The cost will depend on various factors that are personal to you such as:

  • Age
  • Medical History
  • Family History
  • Amount of cover
  • Term of the cover

Generally speaking, life cover is the least expensive as it is the least likely to be claimed on.  Both critical illness and income protection are more likely to be claimed on and are therefore more expensive. The big questions are deciding what cover you feel you should have, as few of us can afford to cover all eventualities or are unwilling to pay the premiums to do so.  You need to prioritise what you want to cover and a good Financial Adviser will make recommendations based on your personal circumstances. Don’t be afraid to disagree with your Adviser or question the recommendations.  I find that when this happens I have to justify my recommendations more fully. This means my clients usually come away happier as they have a better understanding of the products we agree on and arrange.   Life Cover (non‐investment) and Income Protection The plan will have no cash in value at any time, and will cease at the end of the term. If premiums are not maintained, then cover will lapse. Critical Illness Cover The policy may not cover all definitions of a critical illness. For definitions please refer to the Key Features and Policy Documents.

About Ciaran Scullion

I am a Financial Planner and Mortgage Adviser. I provide Independent Financial Advice through my company From Acorns Financial Planning Ltd to personal and business clients throughout Northern Ireland from my base in Tyrone, Mid Ulster.

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