It's tempting to sit back and relax once you've moved into your
new home - but hang on, have you made sure that you're insured
against all the risks that could stop you from paying your
mortgage? Many things could go wrong and make it impossible for
you to work, and in this article we go through each risk, and
assess how important it is that you take that into account. If
you are responsible for a family, then it is particularly
important that you take heed of the following five issues:
What happens if interest rates increase and you can no longer
afford your monthly repayments
What if you get made redundant
What happens if you become ill or have an accident and you can't
go to work
What if you have a serious accident or become critically ill,
and you can never go back to work
What if you die and your family is left to cope with the
outstanding mortgage
These are all questions that new homeowners have to ask, and
find answers to. The good news is, the insurance industry have
it covered, and there are policies out there that can provide
peace of mind against all these possibilities.
On the subject of rising interest rates, you are unfortunate if
you end up in the position where you can't afford the
repayments, because there are mortgages that help protect you
from this. The fixed rate mortgage sets a rate for an agreed
period of time in which your interest rate remains the same
irrespective of the Bank of England base rate. A capped mortgage
allows your payments to fluctuate, but there will be an agreed
rate at which the interest rate that you pay will be capped.
Capped mortgages protect you for an average of 3-5 years, and
then, as with the fixed rate mortgage, it will revert to the
standard variable rate.
55% of all new mortgages are fixed rate deals, so they are by
far the most popular type of mortgage. The capped mortgage is
less popular because it still retains an element of risk, and
they can be more expensive at the outset, which deters a lot of
potential customers. At the end of the protected period, for
both types of mortgage, you can choose to re-mortgage with
another company without paying any penalties. It's a good idea
to keep your eye on the available offers as the end of the
protected period approaches, because there are likely to better
deals out there. The market is so competitive that new offers
are always arising, and they are particularly focused on
attracting re-mortgaging customers. Ask a mortgage broker to see
what else is out there, as they have all the latest information
to hand. You don't have to commit yourself to anything.
If you want to insure yourself against the possibility of losing
your job, then you need Mortgage Payment Protection Insurance.
However it's important to be aware that this type of insurance
is designed to protect those that are made redundant, not those
that resign or are dismissed. We found quotes on the Internet
for around £2.45 per £100 of monthly mortgage payment. Once you
stop working, the insurance will start paying after 30 days and
then for a maximum of 12 months. You can buy this insurance
through your mortgage lender but we don't recommend it, they
always charge more than their internet rivals.
You also have the choice of covering your mortgage payments due
to sickness or illness keeping you from working. However we
recommend checking with your employer first to see if they have
a sickness payment plan in place. Some companies will give their
employees full pay for six months for accident or illness. Even
in this case, it's still worth getting the insurance because you
could be off work for more than six months. It would be very
difficult to meet the mortgage repayments on statutory sickness
benefits alone. This type of insurance also costs £2.45 per £100
of monthly mortgage payment, but you can combine it with
unemployment cover and it's £3.95 per month, which is less than
buying the two separately. Both will cover you for a maximum of
12 months, so you really need to consider what would happen if a
serious accident or illness left you permanently unable to work.
The insurance industry estimates that 1/5 of men and 1/6 of
women have to permanently leave work before retirement age
because of a serious illness or accident. Think about it, if you
have a heart attack at the age of 45 then you are unlikely to go
back to work again. With a family to support, this could be
disastrous.
In this case, then you would need Critical illness insurance -
it covers the outstanding mortgage in full if you are unable to
work again. Look out for "total and permanent disability" cover
- it is essential that it is included in the policy as it
specifically covers the possibility of you not working again due
to accident.
There are a few options to look out for with Critical Illness
Insurance - for example you need "decreasing cover" if you have
a repayment mortgage. This is so the value of the payout
decreases in line with the value of your outstanding mortgage.
It is also cheaper than the alternative: "level cover". You need
this if you have an interest only mortgage because the
outstanding mortgage balance will remain the same.
Make sure you know all the facts about the insurance you buy,
because there will be times that you can't make a claim. For
example, Critical illness Insurance requires you to survive for
a period following an accident or diagnosis of a critical
illness, usually 28 days but sometimes 14 days. If you die
before that time, then no claim can be made on your policy.
To cover the possibility of you dying within 28 days, then you
need mortgage life insurance. Many lenders require you to set up
a mortgage life insurance policy as a condition of you taking
out the mortgage. You don't have to buy it through the lender
however, in fact it will be a lot cheaper if you don't. Also if
you live alone and do not have to support a family, you don't
necessarily need this type of insurance as the lender will
recoup the money for the outstanding mortgage by selling off the
property.
Mortgage Life insurance is the most popular kind of mortgage
protection, and like critical illness insurance, you can choose
between "decreasing cover" and "level cover" depending on
whether you have a repayment or an interest only mortgage.
There's no denying that buying all these insurance policies to
protect your mortgage will cost, but there are a few ways to get
the best value. Firstly, if you combine accident and illness
with unemployment cover then you will save around 20%, compared
to buying them separately. Some insurance companies may refer to
this as "unemployment and disability" cover. Critical illness
and mortgage life insurance also become cheaper if you combine
the two, and we predict an average saving of 20-25%.
And don't forget the most obvious way to save money - shop
around. Your lender will quote you on these insurances, and may
even give you the impression that you have to buy your insurance
through them, but you are free to buy it from any company you
please. So it had might as well be the cheapest! Go online for
the best deals, even better - contact a specialist life
insurance broker and ask them to find the best deals for you.
They can do all the legwork and, if you're not impressed, then
you don't have to buy through them. The advantage they have on
price is due to the hot competition on the Internet, especially
for insurance. Brokers offer better deals by slashing their
commission and giving you a further discount. Search using any
of the following terms: "cheap life insurance", "life
insurance", "life insurance quotes" or "Mortgage Protection
Insurance", and you will come across a number of cost-effective
options.
The other advantage to using a broker is that you have full
access to their expert advice. When faced with the option of
getting a "Guaranteed Premium" or a "Reviewable Premium" for
your critical illness insurance, will you know what it means?
Even if you do, which one is best? That's when a life insurance
adviser is worth their weight in gold. So we recommend picking
up the phone and talking to an expert in person, it doesn't take
long and it guarantees you getting it right first time.
The bottom line: peace of mind comes at a price - but it doesn't
have to be expensive!
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