Part 2: Managing future financial risks

Imagine you have a job and a mortgage, and are living with your partner (who also works) and your children in your beautiful new home. Have you ever wondered what would happen if you couldn’t work, or worse you or your partner sadly passed away?

Unless you are very wealthy and have lots of savings, the likelihood is that it would be a struggle. In your absence, it might be impossible for your partner to continue paying the mortgage on their own and they might be forced to sell the family home. They may also struggle to maintain an acceptable standard of lifestyle.

Why it’s important to manage your financial risks.

For most people, the above situation would be untenable. This is why most people who with a mortgage require life insurance to cover these risks. But strangely, it’s sometimes something that people are reluctant to put in place. Yet most of us would consider it unacceptable not to have insurance for our house, our car or travel insurance.

We think this is because a lot of people don’t understand why such insurance is needed and what risks is covers.

For most people, the above situation would be untenable. This is why most people who with a mortgage require life insurance to cover these risks. But strangely, it’s sometimes something that people are reluctant to put in place. Yet most of us would consider it unacceptable not to have insurance for our house, our car or travel insurance.

We think this is because a lot of people don’t understand why such insurance is needed and what risks is covers.

Different types of insurance.

Decreasing Term Life Insurance (Mortgage Protection Insurance). This is life insurance that pays off your mortgage in the event of your death. It’s usually taken out at the same time as your mortgage, for the same amount you have borrowed and to match the length of the overall term on your mortgage (e.g. 25 years). The amount it pays out in the event of your death goes down over the years, in line with you mortgage debt. Most cover assumes you have a mortgage rate of around 5%. This accounts for rates rise in the future. (If you’ve had the insurance a long time, there is a chance you may have excess cover).

Critical Illness Insurance. This is insurance that pays out a lump sum if you were to have a serious illness or injury. Most insurers have an exact list of what illnesses or injuries are covered. If this happened to you, and you met the insurance policy criteria, the company would pay out a lump sum. This cover is sometimes provided as an addon to Decreasing Term Life Insurance. It can also be purchased on its own for a fixed amount of payout – for example, a year

Income Protection Insurance. This provides a regular income if you are unable to work due to illness or injury. There is no set list of what illness or injuries are covered, the only criteria is that it should be something that stops you from doing your “own occupation”. There is usually a deferred period, typically 1 month, 3 months or 6 months. What this means is that the policy doesn’t start to pay a regular income until you have been unable to work for that length of time. In calculating how long the deferment period should be, we encourage clients to consider their employer’s sick pay arrangements and how much savings they have. The policy is typically paid until the person is well enough to return to work, or the end of the policy term (whichever is sooner). Typically the policy term itself lasts either the length of the mortgage term, or to the planned retirement age.

It is possible to get budget cover which has a maximum payment length of 1, 2 or 5 years. This reduces the cost, but it is not a full solution if you suffer a permanent injury or illness. It does, however, buy you time to make other arrangements.

The other variable which impacts upon the cost of this insurance is how much it pays out per month in the event you were unable to work. Some have options to pay out the maximum, which is typically 70% of gross income, alternatively clients can choose for a lower amount to be paid out which covers the essentials, for example, mortgage, council tax, finance payments, etc. All in all, this is a powerful insurance cover that covers many risks and which can be tailored to any budget.

Family Income Benefit. This is life insurance that pays out an income to a family member in the event of a death. For example, let’s imagine a father dies, and he has Decreasing Term Life Insurance which pays off the mortgage. However, the mother is now on her own with children and no longer has his income for the household. She has many future costs to face, for example school fees, child care and university. Family Income Benefit pays out a regular income to the mother at this point. Clients can choose an annual amount that is paid, and the length of term it pays for, usually until the youngest child is 18 or 21.

Level Term Life Insurance. This is the simplest form of life insurance, and it pays out a fixed amount over a finite period. So for example, £50k to your chosen beneficiaries in the event of your death for the next 10 years. This is used to cover things like day to day living expenses, funeral costs, inheritance tax, etc.

Different types of insurance.

Decreasing Term Life Insurance (Mortgage Protection Insurance). This is life insurance that pays off your mortgage in the event of your death. It’s usually taken out at the same time as your mortgage, for the same amount you have borrowed and to match the length of the overall term on your mortgage (e.g. 25 years). The amount it pays out in the event of your death goes down over the years, in line with you mortgage debt. Most cover assumes you have a mortgage rate of around 5%. This accounts for rates rise in the future. (If you’ve had the insurance a long time, there is a chance you may have excess cover).

Critical Illness Insurance. This is insurance that pays out a lump sum if you were to have a serious illness or injury. Most insurers have an exact list of what illnesses or injuries are covered. If this happened to you, and you met the insurance policy criteria, the company would pay out a lump sum. This cover is sometimes provided as an addon to Decreasing Term Life Insurance. It can also be purchased on its own for a fixed amount of payout – for example, a year

Income Protection Insurance. This provides a regular income if you are unable to work due to illness or injury. There is no set list of what illness or injuries are covered, the only criteria is that it should be something that stops you from doing your “own occupation”. There is usually a deferred period, typically 1 month, 3 months or 6 months. What this means is that the policy doesn’t start to pay a regular income until you have been unable to work for that length of time. In calculating how long the deferment period should be, we encourage clients to consider their employer’s sick pay arrangements and how much savings they have. The policy is typically paid until the person is well enough to return to work, or the end of the policy term (whichever is sooner). Typically the policy term itself lasts either the length of the mortgage term, or to the planned retirement age.

It is possible to get budget cover which has a maximum payment length of 1, 2 or 5 years. This reduces the cost, but it is not a full solution if you suffer a permanent injury or illness. It does, however, buy you time to make other arrangements.

The other variable which impacts upon the cost of this insurance is how much it pays out per month in the event you were unable to work. Some have options to pay out the maximum, which is typically 70% of gross income, alternatively clients can choose for a lower amount to be paid out which covers the essentials, for example, mortgage, council tax, finance payments, etc. All in all, this is a powerful insurance cover that covers many risks and which can be tailored to any budget.

Family Income Benefit. This is life insurance that pays out an income to a family member in the event of a death. For example, let’s imagine a father dies, and he has Decreasing Term Life Insurance which pays off the mortgage. However, the mother is now on her own with children and no longer has his income for the household. She has many future costs to face, for example school fees, child care and university. Family Income Benefit pays out a regular income to the mother at this point. Clients can choose an annual amount that is paid, and the length of term it pays for, usually until the youngest child is 18 or 21.

Level Term Life Insurance. This is the simplest form of life insurance, and it pays out a fixed amount over a finite period. So for example, £50k to your chosen beneficiaries in the event of your death for the next 10 years. This is used to cover things like day to day living expenses, funeral costs, inheritance tax, etc.

Conclusion

For example, is insurance paid out at a fixed rate or does it go up with inflation (RPi index linked policy)? Otherwise, when a client claims in 20 years’ time, the payment won’t be worth the same as it is today.

Also, the definitions of critical illness might differ, for example. Life cover is often quoted on standard terms, but can then be subsequently rated due to medical history, general health (BMI) & hobbies. So, a good adviser will know which insurers will cover people who like to do rock climbing or motor sport.

As you can see – insurance is a complex topic. So get in touch with us today and we can give you all the information you need!

Hey Mortgages - Mortgage Advisor Manchester IconHey Mortgages - Mortgage Advisor Manchester

Adamson House, 106 Wilmslow Road, Didsbury, Manchester

4.8 19 reviews

  • Avatar Joey Crone ★★★★★ 7 months ago
    Genuinley can't speak highly enough about Thomas. To say he went over and above for us is an understatement.
    He was proactive, knowledgable and diligent throughout our house move and helped us enormously with his experience and
    … More his good humour.
    Honestly, let him sort your mortgage. There won't be a better option.
  • Avatar Tina T ★★★★★ 6 months ago
    Helpful. Knowledgeable. Informative. Helped give me the information I needed & sought the most cost effective, suitable mortgage for my circumstances. Always available to answer any questions (no matter how many I had!) and kept me … More updated throughout. Would definitely recommend and use again if/when needed
  • Avatar bekki ★★★★★ 9 months ago
    I was recommended Hey Mortgages through a friend and I found Mr. Hughes to be very Knowledgeable, friendly and keen to get me the right product for my Mortgage. Since my remortgage with Mr. Hughes I have and will continue to recommend him … More to my friends and acquaintances. He has a professional manner which makes me feel I will get the best value on the market.
  • Avatar Anthony Chiu ★★★★★ 7 months ago
    We found Thomas through a recommendation and he has been professional and friendly throughout our remortgaging process, offering us sound financial advice along the way. We also didn't give him much time before our existing mortgage's … More fixed rate period was due to end, but he's managed to speed things up - we really appreciate this!
  • Avatar Dan Jones ★★★★★ a year ago
    Great service and support. We had a complicated set of needs and our advisor couldn't have been more helpful. Great attention to detail. Would highly recommended
  • Avatar Harry Mustoe ★★★★★ a year ago
    We have used Thomas for a number of private and business mortgages. Thomas is a personable and knowledgeable advisor. There is no hard sell just a clear overview of the options. Once you choose a mortgage Thomas drives things personally … More ensuring minimum hassle and on time completion!
  • Avatar runninglate100 . ★★★★★ a year ago
    Couldn't have asked for better advice and support to buy my first house and negotiate my recent remortgage. Trustworthy, honest and clear explanations through the whole process. Thank you Cai!
  • Avatar pontdain . ★★★★★ a year ago
    Thomas at Hey Mortgages has now successfully brokered two mortgages for me and they were both arranged with a minimum of hassle.