The protection products to consider when you take out a mortgage
Taking out a mortgage is likely to be one of the biggest financial commitments you make. As a result, you may be considering taking out a protection product to ensure you can continue to meet payments should the unexpected happen.
It’s a common misconception that protection products don’t pay out. Figures from ABI show in 2017, a record £5 billion was paid out in protection claims and almost all claims (97.8%) were paid. Insurers pay out nearly £14 million every day to those that may not have otherwise been able to make their mortgage payments or other financial responsibilities.
If you’re worried about how you and your family would cope if your income suddenly stopped, a protection product can give you peace of mind.
There are several different types of protection products available to choose from. Which one is right for you will depend on what your concerns are and your circumstances. Among the options available are:
Mortgage Protection is designed to cover the cost of mortgage payments if you’re no longer working in the event of illness, injury or unemployment.
The policy will typically pay you a percentage of your salary, such as 65%, with a cap on the monthly amount. Often, these types of policies will only continue to pay out for a year or two, but they can help to cover costs in the short and medium term. The money paid from a Mortgage Payment Protection product will often only cover the essentials, so you may need to look at other products or building up an emergency fund to supplement this.
Nobody wants to think about passing away. But if your family would struggle to cope financially if this were the case, life insurance may be the right product for you.
A life insurance policy will pay out a tax-free lump sum if you die during the term of the policy. The premium paid for life insurance will depend on a number of factors, including your health and the level of payment. You have the flexibility to choose a payment amount that would reflect the needs of your family, for example, enough to pay off the mortgage and cover other financial obligations.
The term insurance is often used interchangeably with assurance. However, they do have slightly different meanings and protections. Life Assurance will typically cover your entire life and pay out will usually be guaranteed. As a result, premiums tend to be higher.
Critical Illness Cover
Again, nobody wants to plan for being too ill to work. But the reality is that it could happen.
Critical Illness Cover will pay out if you’re diagnosed with a specific medical condition or injury that’s detailed in your policy. ABI estimates that one million workers are unable to work due to illness or injury every year, affecting their financial security. The cover will pay out a lump sum, after which the policy will end.
It’s important to be aware that Critical Illness Cover doesn’t cover every illness. Always check the terms of any policy before signing up.
Income Protection can provide you will a stable source of income should you no longer be able to work due to illness or injury. They typically cover most illnesses that leave you unable to work, rather than defined illness like Critical Illness Cover.
Payments received from Income Protection products are tax-free and are usually a percentage of your earnings: between 50 and 70% is standard. Income Protection products will usually continue to make monthly payments until you’re able to go back to work or, in some cases, until you retire.
Depending on your needs, you may find the ongoing payments of Income Protection are better suited to your circumstances than a lump sum.
Many policies will have a deferred period, sometimes for several months, before they begin to pay out. Therefore, it’s important to ensure you have an emergency fund that you can dip into to keep you going until the payment begins. In some cases, the deferred period can be useful. If, for example, your employer pays sick pay, you can opt for an income protection product that will align with this.
Policies can vary between different providers significantly. As a result, it’s important to make sure you fully understand what is covered and other key factors, such as fees and the deferred period.
Choosing a protection product can feel overwhelming with so much choice on the market and numerous factors to consider. We can help you make sense of the protection products you could benefit from. Please contact us to start the process.
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