Critical Illness

Critical Illness

5 ways to protect your mortgage

Critical Illness, Income Protection, Life Assurance, Mortgages, Protection
featured image

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.

5 reasons not to take out Protection Insurance

Critical Illness, Income Protection, Life Assurance, Protection
featured image

Why you shouldn’t take out protection Insurance

“Who on earth wants to pay for insurance, sure it never pays out anyway!”

“The state can look after me if I get sick, that’s what I’m paying my taxes for!”

“My employer will look after me if I can’t work.”

“Life assurance costs too much”

“Sure it won’t happen to me?”

These are some of the answers I have received when I ask clients about whether they have thought about protecting their family.

We all know it’s a legal requirement to insure your car and if you have a mortgage your lender will insist that you insure your house.  However we choose whether or not to protect our family in the event of our death, in the event of being diagnosed with a critical illness or simply being unable to work due to ill-health.

Protection Advice

Types of Protection Policy

Protection can be split into the following 3 groups:

Life Assurance – This can pay out a lump sum or an income to your dependents if you die

Critical Illness Cover – This pays a tax-free lump sum if you are diagnosed with a serious illness and can also be added to a Life Assurance policy

Income Protection – This can pay out a monthly sum to cover bills in the case of sickness or injury

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.

The policy may not cover all definitions of a critical illness. For definitions please refer to the Key Features and Policy Documents.

The Protection Insurance Myths

1. Sure it never pays out

If you read the tabloids you can be forgiven for thinking that insurance never pays out.  According to research carried out by Life Search the general public believe that only 38 per cent of protection insurance claims get paid.

Insurers generally publish their claims statistics for life cover, income protection and critical illness on an annual basis.  As stated earlier pay out rates for most providers are generally over 90%.

2. The State can look after me

If you are unable to work because of illness or disability, you can claim Employment and Support Allowance.  However if can live on the following, good luck to you:

Time period

Circumstance

Weekly amount

First 13 weeks

Under 25

£56.80

First 13 weeks

25 or over

£71.70

From 14 weeks

Work Related Activity Group

Up to £100.15

From 14 weeks

Support Group

Up to £106.50

You can insure your income for up to 65% of your gross earnings (depending on the insurer).

It’s important to note that if you die there is no significant payout from the state to your family. 

3. My employer will look after me if I can’t work.

Most UK employees will only receive Statutory Sick Pay of £86.70 a week for the first 28 weeks if they were off sick long-term. You may get slightly more if your employer generous.

Swiss Re estimate that only a quarter of UK employers provide any life insurance, income protection or critical illness cover as a benefit to their employees.

Note that if you are one of the lucky employees check that you are not over insured. For instance two separate income protection policies covering 50% of your income will still be limited to a maximum pay out of 65% of your pre injury gross income.

4. Life assurance costs too much

Regardless of the price there will always be those who say it costs too much.  However the reality is life assurance is cheap, dirt cheap if you are young, fit and healthy.

The price of protection policies is affected by factors such as your age, health, family history, the amount and term of the cover.

You can get life assurance cover from as little as £5pm.

5. Sure it won’t happen to me

Of all the dodgy reasons not to protect your family, this is my favourite. This one is straight from the mouth of each and every ‘Mr Invincible’ in the country.

More than 1 in every 3 of us are likely to develop some form of cancer during their lifetime.

We all have a relative that just loves to tell us about so-and-so down the road who had a car accident and will never work again. Or thon eejit down the road who got badly injured playing football and him with three young children to look after too.

But sure it’ll never happen to you.

Hopefully I have smashed some of the common misconceptions about protection policies and made at least one person think again.  Remember once you have a family, the insurance you buy is not just for you it’s for them.  You are protecting your family’s lifestyle, their home and most importantly their future.

If you decide to ignore these needs then so be it but it is essential that we understand the consequences of our actions and take responsibility for them.  If the proverbial hits the fan, don’t let these myths be the reason you decided to nothing.

If you would like some advice on protecting your family, please give us a call on 02895 815000.

Image credit