Paul Gilchrist from County Financial Services talks OTS through the options that you should consider….
Protection policies such as life insurance, critical illness cover, unemployment cover and sickness protection often go hand in hand with mortgages to ensure that the bills can still be paid if something unexpected happens to a key provider of income into the household.
So we spoke to Paul, to better understand the options available in what can be quite a confusing market.
Paul Gilchrist explains: “A life insurance policy doesn’t necessarily need to be based around a mortgage, although traditionally this has often been the case as a bank or building society will offer this whilst doing a mortgage, and strongly advise it. In some cases they have insisted on the buyers having a life policy as this protects the banks loan in the unfortunate circumstances of the death of one or both of the mortgagees”.
“However you can have a life insurance policy with or without a mortgage. What is called a “level term” life policy pays a set amount in the event of your death within the policy term. If you insure your life for £300,000 over a 25 year term, if you die within that period you will receive that amount. The product that is more aligned to your mortgage is what is called a decreasing term policy and this is designed to run in parallel with your mortgage. If you had a 25 year mortgage of £300,000 you would take a decreasing term life policy of the same amount over the same period”.
“In simple terms, if you died in year 1 of the 25 year mortgage period you would receive a pay-out of around £300,000 that covered the outstanding mortgage as you’d hardly have paid any of it off. However if you died in year 23 of the 25 year team, the sum paid would be a lot less as your mortgage would have reduced dramatically in this period. A decreasing term policy usually has smaller monthly premiums to reflect this and gives you piece of mind that the mortgage will be paid off in the event of death.”
“In terms of choosing between a level term policy and decreasing term policy, this really depends on your circumstances and whether you want to leave your family some surplus money on top of covering your mortgage. Whilst a mortgage repayment is often the largest item of expenditure for a family every month, there are plenty of other monthly costs that would need to be covered. Car leasing costs, utility bills, school or university fees, food, clothing, the list goes on. A level term policy allows you to calculate a figure that would pay off your mortgage and also leave an additional surplus to cover missing income should the worst happen.
“Giving an example, you might choose a £500,000 level term policy. £200,000 if this would pay of the mortgage, leaving an additional £300,000 to look after your family. That’s £1000 a month over 25 years to run the household and pay the monthly bills”.
OTSNew.co.uk then asked Paul about critical illness cover and whether this should be considered. “Again, it depends on your personal circumstances. What I can say is that it is far more likely that you get a critical illness than actually dying. So you need to ask yourself, if I couldn’t work for a prolonged period or couldn’t work again due to a critical illness and my income stopped, would this affect my ability to pay the household bills and put the family under further strain?”
Paul concluded “A protection product that is rising in popularity is actually designed for businesses and is what is known as Key Man Cover. Key Person Protection is a business insuring itself against the financial loss it would suffer if a key person in their business died or were diagnosed with a specified critical illness if chosen, during the length of the policy. This is normally taken for owners and directors of the business and sometimes senior managers. This works in much the same way as a life insurance policy but the payment would go to the business to make up for the financial loss of losing a key person”
You can find out more about mortgage requirements, life insurance and other protection policies by contacting County Financial Services on 01704 334 324 or visit www.countyfinancialservices.co.uk or go to their offices at 9 Hoghton Street, Southport.
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