What is Mortgage Protection?
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Mortgage Protection | Better Financial Services
We are going to look at what the term ‘Mortgage Protection’ means and how important it is in protecting you and your family should the unthinkable happen.
What does the term Mortgage Protection mean?
Mortgage protection simply means protecting yourself and your family in the event of death, in the event of critical illness, or if you couldn’t work due to accident, sickness, and unemployment.
Very often when someone takes out a mortgage, they need to have some sort of protection in the form of insurance cover in case of the unknown.
Why do we need life insurance? What is it and how does it work?
You need life insurance in the unfortunate event that you should pass away. If you don’t have this, your family could lose out.
If you’ve got a mortgage with big payments i.e. five, ten, however, many years left, you could leave your family in a pretty tricky situation. Life insurance is there to make sure that if you were to pass away, your family or those dependent on you will not have to suffer financially as a result of your death. It’s all about protecting what’s most important to you.
What does relevant life insurance mean and is that a tax-efficient form of life insurance?
It isn’t available to everyone. Only to those who are self-employed people, company directors, etc. A relevant life policy is relatively the same as a life insurance policy. It covers you for a certain term. The maximum age you can go up to is seventy-five and it’s normally a level term policy.
The main difference between the two is that relevant life insurance is owned by the company, but it still covers you, the individual, and the bonus is the tax efficiency. You can write it off as a tax-deductible business expense. Therefore, it costs you a lot less than if you had to take out a private policy and pay yourself a salary in dividends and then pay for your protection. It’s a very, very tax-efficient way of making sure the family is protected.
What is critical illness cover and do I need that?
If you work and most of your income is earned then, yes, you do need critical illness cover.
It makes sure that if you get a specified critical illness, a lump sum is paid out to you so you can use that to cover your mortgage payments, your gas, electricity, and your general household bills. If you’ve got children, it covers food and clothes costs, etc. To make sure you can still have a living without worrying about money but to rather focus all your attention and energy on trying to get better.
What is income protection?
Income protection is a form of insurance that does what it says on the tin, it protects your income.
If you were to get sick or have an accident, break your leg, and end up in a wheelchair. You wouldn’t be able to work for a long time. Income protection just simply pays you monthly amounts until either you’re able to go back to work or until the end of the term of the policy or until the specified time, which you arrange.
There are two types of income protection:
- Budget protection, which normally has a payout period of only about two years.
- Full income protection, which pays a set amount until retirement.
A lot of people take out income protection, when they take out a mortgage because they don’t have to cover their income. You can just cover your mortgage payments. So at least if you couldn’t work due to an accident, sickness, or injury, your mortgage payments are covered for a certain period.
What is a family income benefit?
Unfortunately, it’s not as popular as the rest. It works in the same way as life insurance. However, whereas life insurance pays out a lump sum, family income benefit pays out a yearly amount.
It pays off the benefits yearly. Now because of that, it could be seen as a decrease in term life insurance policy
If you were to take out a policy until you were 60 but died the next year, then your family gets a much bigger payout. This is because they get the money for a much longer period, whereas if you were to die at 55, they would only get about ten thousand pounds a year, for five years.
Are some people using protection and life insurance to pay for things like inheritance tax? Is that right?
Inheritance tax is something a lot of people don’t know a lot about. Let’s say you did well in life. You had a three-million-pound house, you had no partner, you just had a son for example, and you passed away. You would naturally think your house would go to your son, most people would.
The house does go to your son however if he wanted to keep the house he grew up in he would have to pay a half million pounds to the taxman. He would also have roughly about a year or two years in which to make that payment. Otherwise, he has to sell the house to pay the taxman.
Life insurance can help in that sort of situation. You can take out what is called a ‘whole of life policy’ and a whole of life policy is paid out when you pass away. Policies placed in trust, doesn’t form part of your estate and goes to pay any inheritance tax bill that your dependents may have.
Your financial adviser can try to mitigate it as much as they can, but they can’t always get rid of all of it. So, the life insurance policy is there to cover that cost.
Reviewing Existing Policies
Protection is one of those things that is very, very individual. Everyone’s different and everyone’s family setup works differently. Therefore, it is important to speak to an adviser who will understand your circumstances, understand your concerns, and be able to advise you on products that meet those circumstances and those concerns. To decide on a budget that’s affordable for you too, because you need to be able to afford your protection policy long term.
Is it possible to get life insurance cover if I’ve got pre-existing medical conditions?
The short answer is yes. You can get life insurance with pre-existing medical conditions. Of course, all of that depends on what medical condition you have.
Typically, if you have a medical condition, your price will go up.
Some insurers increase it more than others because each insurer has a different risk tolerance for each condition. For example, there are some insurers out there who increase your premium by seventy-five per cent if you’ve got diabetes and that is just a standard rule.
Some may not increase it, if your diabetes is very mild, you’ve had it for a short time and it’s under control. If you don’t know that, you could be paying seventy-five percent more when you could be paying someone a lot cheaper elsewhere. You would probably need a doctor’s report or nurse screening to give the insurer the whole picture.