Do I need mortgage protection?

When purchasing a property, or indeed remortgaging an existing property, an area that can sometimes be overlooked by the borrower is whether or not they have adequate financial protection in place to ensure that they and/or their family could remain in the mortgaged property should the worst happen. This is an important consideration, and as such the prudent homeowner will need to allocate sufficient funds in their monthly budget to cover themselves for such an eventuality.

For example - if a homeowner with a family dies during their mortgage term, then the monthly cost of the mortgage will need to be maintained by their surviving family members should they wish to stay living in the property. In this scenario the remaining family would have a much better chance of being able to cover their monthly expenditure, given their likely reduced household income, if there were a lump sum available to clear their mortgage debt. Monthly mortgage repayments typically use up around a third of take-home pay for an average household.

Similar financial issues can arise in a scenario whereby the homeowner does not die but rather is unable to work for a prolonged period of time due to significant illness or accident. According to a recent survey by the Money Advice Service, only 40% of UK adults have more than £500 in savings that they could call upon in an emergency. A similar survey by ING found that 28% of UK adults have no savings whatsoever.

It is also worth considering whether simply clearing the mortgage debt would be sufficient to ensure the property could be retained. Bills for heating, electricity, water, and Council tax rates, plus numerous other ongoing living expenses will also need to be accounted for.

The risk for homeowners who are simply hoping it won’t happen to them can be seen in the following data, which is sourced from LV= and is based on a 35 year old non-smoker with a 30 year mortgage term.

The insurance industry has evolved over the years, and now provides a suite of products that have been specifically designed to cover those who find themselves in similar predicaments to the scenarios detailed above:

Life Cover

These policies, in their simplest form, pay a lump sum if the policy holder dies within the policy term. The lump sum can be set to reduce over time to match the balance of a repayment mortgage, and the policy can be joint life such that the lump sum would be paid if either of the policyholder’s were to die during the term.

Critical Illness

Critical Illness policies can be set up in exactly the same way as described above for Life Cover, however the lump sum is paid upon diagnosis of one of a number of predefined serious critical illnesses, such as types of cancer or heart conditions. The lump sum can again reduce to match the outstanding balance of a repayment mortgage.

Family Income Benefit

These policies again pay out if the policy holder dies within the policy term, however they differ from straightforward Life Cover to the extent that they pay a regular monthly benefit rather than a single lump sum. They are therefore ideal to cover ongoing monthly bills and other living expenses for a surviving family.

Income Protection

Income protection policies are designed to provide a replacement income should the policy holder be unable to work due to illness or accident. These policies therefore provide a means to continue paying monthly mortgage repayments and other associated living expenses during the recovery and recuperation period. Should the individual never recover sufficiently to return to work, then these policies can continue to provide the replacement income right up to the point that their retirement income can be drawn upon.

How much does financial protection cost?

The cost of these policies is primarily dictated by the amount of benefit that would be payable in the event of a claim. However there are a number of other factors that can also significantly impact the cost, and in some cases these can result in it becoming impossible to set a policy up at all:

• Age of applicant
• Health history of the applicant and their immediate family
• Lifestyle
• Occupation

How much cover is sufficient?

Everybody has their own unique financial circumstances, plans, and objectives to consider, and as such it is important for any homeowner to thoroughly review the implications of dying or suffering a serious illness during their mortgage term.

Depending on their occupation, some employees are entitled to valuable benefits through their employer, such as a Death in Service lump sum, or Sickness Pay. These employee benefits can reduce or eliminate the need for standalone policies to be taken out. It is, however, a risk to rely solely on these benefits because there are no guarantees that the individual will always work for such a generous company throughout their entire working lifetime.

Your home may be repossessed if you do not keep up with repayments on your mortgage, or other loan secured on it.