When people think of Insurance for a Mortgage the usual assumption is that you will need Life Insurance, it’s simple, low cost cover and if you or your partner should pass away during the term of the policy then the survivor should receive the sum insured which could pay off the mortgage balance and save them losing their home as well.
However you may be unable to work because of illness or injury and as a result have difficulty keeping up with payments on your mortgage and other household costs. Life Insurance can’t cover you for these or life changing illness or injury. You would still have your mortgage debt to make payments on and a family who are relying on your income. So we need to look at alternatives or options that actually suit your circumstances.
There are simply two types of benefit and several options for each. The two types are Lump Sum or Income. Fairly self explanatory, but as examples Mortgage Life Insurance is usually a lump sum as it is needed to pay off the mortgage balance whereas Payment protection or Income Protection are monthly payments as they are designed to replace some of your monthly income.
A monthly income if you can’t work.
When you’re ill or injured and can’t work, Income Protection Insurance is designed to support you.
The monthly payments could cover some of your lost earnings, allowing you to concentrate on looking after your health and helping to maintain your lifestyle while you’re away from work.
You can choose how soon you will receive your payments (to fit with your employee benefits) and how long the policy will pay out for (to fit with your budget). Your adviser will discuss the options with you.
What is a critical illness policy?
Perhaps the original name for Critical Illness cover better explains what it does… it used to be known as “Dread Disease Insurance”. In fact, it still is in some countries.
These are the eventualities no-one wants to think about – the kind of diseases that give you a giant, and sometimes expensive, battle or leave you with a life changing disability.
Critical illness cover can pay you a tax-free lump sum if you are diagnosed with one of the defined critical illnesses during the policy term. This money can be used to modify your home, pay off the mortgage, or allow you to obtain private medical care more quickly than the NHS.
While you continue to pay your premiums, you should be covered throughout the term. Once the policy term ends, all protection stops.
Your adviser will ask how long you want the policy to run (the “Term”). This may be until your children have grown up, or until you have paid off the mortgage.
Critical illness cover is often available as a combined policy with term life insurance. In these instances, you can often only claim once. For example, if you make a claim after being diagnosed with cancer and receive a payment the policy will come to an end. So, it may be advisable to have separate Critical Illness and Life policies.
Do you need critical illness insurance?
Most people could benefit from a critical illness policy. You must also consider the balance between the monthly cost and the potential benefits of a lump sum payment. This could be exactly the kind of protection you need if you and your family depend heavily on your wages.
If you have no financial commitments or dependants, critical illness insurance may not be so important for you.
Which illnesses are covered?
Each Insurer will have their own specific list of illnesses and definitions and optional extras, so it is important to check the details of a policy before you buy. Your adviser will discuss your specific requirements.
Policies will commonly cover illnesses such as various types of cancer, heart attacks and strokes, and may include optional add-on illnesses.
Some of the usual conditions classed as critical illness include:
- Major organ transplant
- Parkinson’s disease
- Motor Neurone Disease
- Traumatic head injury
- Bacterial meningitis
- Multiple Sclerosis
Critical illness and terminal illness are different. A stand-alone Life insurance policy should cover any illness where you are expected to die within 12 months of diagnosis.
Your medical history
You will be asked for basic details such as height and weight (and possibly waist measurement) to ensure an accurate quotation. During the application process, you will be asked about your own, and your close family’s, medical history. This allows accurate underwriting by the Insurer, enabling them to decide how much of a risk you are, and hence to calculate an accurate price for your policy.
It is vitally important to be honest during this process, as your insurer could refuse to accept any future claims if they find out that information on your application is false.