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Mortgage Protection
Mortgage Protection

Mortgage Protection

Gio Mandato and Julian Nicolls talk us through mortgage protection.

Is it tricky to discuss mortgage protection with clients?

People are sometimes reluctant to talk about it. They might think they don’t need it or that it won’t happen to them. Often it’s only as people get older and maybe have problems in their own family or have friends or colleagues who have health issues, that it becomes front of mind.

By that time people might have their own medical conditions or be older, which can make it harder and more expensive to arrange protection. We always encourage people to look at protection as soon as they’re taking out a mortgage. There isn’t a one size fits all solution with mortgage protection. There’s a whole range of different options available for different circumstances.

Why is mortgage protection so important?

It’s just that nobody knows when their time is up. The average age of a life insurance claimant is 58 years old. That does reflect the average age of a mortgage borrower perhaps. The average age of becoming mortgage free is nearly 60.

So someone might get quite a way through their mortgage and find that they need to claim. But I’ve known people claiming on life insurance for their partner when they’re only in their 30s and 40s – so it can happen at any time.

I’ve had clients ask me what happens if they take out life insurance, pay for all the premiums and pay the mortgage off and haven’t needed the life insurance. I always say – that’s what we want.

That’s what everybody wants, but the point of life insurance is for the people who don’t get that far. You need to have a plan B in place if something does go wrong. The three main areas of Insurance that we look at for people are income protection, critical illness cover and life insurance.

What happens with a mortgage that has been completed without protection?

Instead of me giving you some statistics, I’m going to tell you a very personal story. Back in 2003 when I was young, my parents worked hard for what they had. We didn’t have much but we always had food on the table and a roof over our heads.

My dad unfortunately suffered from a heart attack. He was in his 50s and we had nothing to protect us against that eventuality. A very sketchy three months went by with my dad having what was originally going to be a triple heart bypass then ended up being a quadruple heart bypass. Basically he’s more machine than man now! My mum worked every hour under the sun to keep food on the table and the roof over our heads.

In December 2008 I remember my parents saying that Christmas wasn’t going to happen that year, because they physically couldn’t afford it. It must be very difficult to tell your children that.

So even if you take the mortgage out of it, the debts and everything like that, it’s the more personal things, like Christmas and holidays, that people have to sacrifice.

Why do we need life insurance?

No individual person needs life insurance because, to put it bluntly, you’ll be dead! The reason you take life insurance is to protect those who are left behind.

I’ve had a couple in the office here this week where I said to the husband that he needs life insurance for his wife. If she dies, you lose her income. And it’s the same for the wife losing her husband.

It’s really important for families with children to think about who’s going to look after them if you’re not here. Who’s going to pay for their food, clothes, everything they’re going to want and need?

So it’s not just about making sure that mortgage is paid off. The mortgage is often the most important thing for people to think about for life insurance. But it’s also about making provisions to care for the people left behind.

Do I need critical illness cover?

Critical illness cover is similar to life insurance. The idea is that it pays out a lump sum on diagnosis of a critical illness. The difference is that with life insurance, you won’t make a claim yourself.

But take my scenario for example. My dad is still around, he survived and now has a very comfortable life. But if they had had critical illness cover at the time, we may not have had the same financial stress. The mortgage would have been paid off, a major outgoing that’s reduced.

It’s common knowledge nowadays that sadly one in two of us will get cancer – and unfortunately we don’t know which one of us it’s going to be. Having that policy in place is like a safety net. It means you won’t have to work so hard at a time where you want to be with your family.

What is income protection?

After Covid, everyone is familiar with the furlough scheme. Income protection can be described as your own personal furlough scheme, or your own personal sick pay scheme.

It’s there to provide a monthly replacement income if you’re unable to work. Typically, you will be insured for the job you are doing at the time you take the policy out. So if you’re no longer able to do that specific job, you can claim that monthly income – or proportion of monthly income – until you’re able to return to work.

Typically we will set up a policy to start paying out once your sick pay finishes. So somebody may get six months’ sick pay from work. They might think that’s adequate – but typically the duration of a claim on income protection is 3.5 to 4 years. So six months’ sick pay isn’t going to cut it.

We would certainly recommend that people have their income covered until they plan to retire.

What is family income benefit?

Family income benefit is a form of life insurance, in that it pays out if you were to die. But instead of it paying out a lump sum, it actually pays out a monthly income, a little like income protection.

In terms of why it would be important, I’m going to reference everyone’s favourite TV family, The Simpsons. Homer is the only breadwinner and you have Marge, the three kids, the dog and cat. Any broker worth their salt would tell them to have life insurance. If Homer were to pass away, they claim on the policy and the mortgage is gone. Fantastic.

But what happens next? There are lots of other outgoings: council tax, food bills, clothing, energy, transport costs. Lots of things that would still need to be paid. Marge would have to start work which would then mean there’d be childcare bills. But family income benefit would provide a regular level of income until the point where the children are no longer dependent. Then she can go back to work and life carries on.

Can you combine protection policies?

Yes, you can. They are complementary in many ways. If we go back to the example of the Simpsons, Homer’s working at the power plant for Mr. Burns. He’s not known for being a good employer and doesn’t pay Homer any sick pay.

So Homer’s off work with a bowling injury. He’s twisted his ankle so he can’t get to work. His income protection’s going to pay him a monthly income until he goes back. He’s got life insurance to pay off the mortgage in full if he dies. He’s got family income benefit to provide a lump sum to Marge if he dies as well to cover all those bills.

He’s also got some critical illness cover. He is a bit of a drinker. He’s always at Moe’s Tavern on a Friday night sinking a few Duff beers and he’s a bit overweight. Marge is a bit worried: he might have a heart attack. He might have cancer. So they take out some critical illness cover. If he is diagnosed with something nasty there’s going to be a lump there to help the family.

Some people think that they can’t have income protection and critical illness cover at the same time but they are there to fulfil different needs. Critical illness cover gives an immediate lump sum, and income protection is there to pay your regular bills.

I’ve had customers in the past who’ve made claims on critical illness cover. One lady was diagnosed with breast cancer and her mobility was severely restricted. She wasn’t able to get upstairs anymore. They didn’t have a mortgage, and they used the money to make adaptations to their home so that she could live downstairs. They put in a new bathroom and bedroom on the ground floor.

You don’t know what you’re going to ultimately spend the money on until you make that claim. Everybody’s circumstances are different. You might take out cover to pay off a mortgage. But when the time comes that money might be best suited for something else. It’s about choice, peace of mind and making financial decisions easier.

How much should I budget for mortgage protection?

If we were sitting at a table with six advisors in the room I would bet that you would get six different figures in terms of what you should budget.

Some people say you should budget a percentage of your mortgage payment. Some say you should budget a percentage of your income. But ultimately, you should budget what you’re happy to pay until the end of your life.

It’s not like car insurance where you can change to a new provider and save money. Take critical illness, for example. The average mortgage debt is £138,000 in the UK. A 30 year old taking that amount of critical illness cover (depending on provider and any medical conditions) would be around £21 a month. Fast forward 10 years – they are now 40 years old. That same level of cover costs you £42 a month. At 50 years old the cover is over £100 a month – so it’s definitely something to take out at an early age. You need to be comfortable to pay that for the rest of your life. If you take it out at a later stage it’s going to be much more expensive.

Sometimes we talk to clients and their budget doesn’t allow them to pay for everything that they need. In that case we work through their priorities. What’s the most important thing to cover? Some cover is always better than none.

But what a financial advisor will do is work out the best mix of cover for each individual client within their budget. There’ll be meaningful cover to take out, even if you’re on a very limited budget.

How can a broker help with mortgage protection?

It’s very important to understand that insurance is not a one-size-fits-all type of thing. Some insurers will provide better levels of cover. Some will not include some existing medical conditions. Trying to go through it yourself is difficult – how can you decide the best provider for your circumstances?

That’s where we come in. We go through the key benefits of each provider and work out who’s going to be the best for you. It’s not necessarily the cheapest. It’s the best. So speak to a broker and we’ll prioritise for your budget and find something that ticks as many boxes as possible at a price that you’re happy paying.

People shouldn’t be frightened to talk about protection. And don’t worry that you’re going to have some pushy salesman trying to sign you up to everything at an exorbitant amount. That’s not what it’s about.

A mortgage broker is there to guide and explain and give appropriate advice within your budget. We’re very mindful of cost of living concerns. People aren’t prepared to pay a lot of money for things but we are there to protect you. The last thing we want is for a client to need to make a claim and find that they hadn’t taken out the right protection. That’s a horrible conversation to have. We just want to make sure that our clients are looked after.