For most households, the largest debt they have is the mortgage. In the excitement of purchasing a new home, not everyone considers what would happen if the main mortgage borrower lost their job. Even with a joint mortgage, many couples would struggle to keep up with the mortgage payments if one partner lost their income, and skipping mortgage payments could put your home at risk.
State benefits will not cover the full cost of the mortgage, but mortgage insurance provides the peace of mind in knowing that if you lose your job, the mortgage payments will be covered.
Mortgage protection insurance
Mortgage protection insurance policies will pay the monthly mortgage repayments for up to a year. Most people who lose their job because of illness or an accident are able to return to work in less time than this.
You can take out a policy that will also cover redundancy, though if your employer provides generous redundancy payments, this extra cover may not be necessary.
Most policies will pay between £1,500 to £2,000 a month or a percentage of your salary. If you have a large mortgage and this amount is not enough, then it is advisable to have savings to cover any shortfall. There may also be a waiting period before payments start.
Critical illness insurance
If you are diagnosed with a critical illness that means that you will either be off work for a long time, or never be able to return to work, then you will not be covered for an extended period by mortgage protection insurance.
Critical illness insurance will pay out a lump sum of you are diagnosed with a critical illness covered by the policy. This lump sum could then pay all or a portion of your mortgage.
Income protection insurance
Income protection insurance pays out regular sums if you are unable to work through sickness or injury. Many policies pay out until you return to work or if you die. There is no fixed payout period, though it is possible to buy short-term income protection insurance with cheaper premiums.
The amount insured is usually between 50% to 70% of your salary. The money paid out can be used for anything and is not tied to your mortgage, though obviously paying the mortgage will be a priority for most policyholders.
Life insurance pays a lump sum when the policyholder dies. Many people take out life insurance so that if they die, their dependants do not have to worry about paying off the mortgage.
A life insurance policy can be for a fixed amount or a decreasing amount. A decreasing amount policy can shadow your mortgage. As the outstanding balance on your mortgage decreases, so does the life insurance payout.
What cover should you choose?
The type of insurance you need is dependent on your circumstances. Ideally, you should take out both life insurance and another form of insurance that will protect your mortgage.
Why not talk to Ascot Mortgages today to find the right policy to suite your individual needs?