24 Nov INCOME INSURANCE: PROTECTING YOUR MORTGAGE & QUALITY OF LIFE
Ask yourself an important question: If I, or my partner, suffered a reduction in income through incapacity brought on by an accident or serious illness, how would the mortgage and all other living expenses get paid?
How would the family cope? What cut backs would be required and how would this affect yourself and any financial dependants?
Think it won’t happen to you? Nobody ever does, but statistics show there is a real risk that either you, or someone you know WILL suffer a loss of earnings before the mortgage is repaid or before they retire.
Some other important questions to ask yourself:
- How much does my household spend per month?
- For how long would my savings cover my essential expenses?
- Could I rely on my employer?
- Could I rely on the state?
- What insurance do I have?
- Would I like the mortgage to be repaid by a lump sum in the event of a life changing illness?
Should you get Independent Financial Advice?
If you don’t have any insurance, you should get advice NOW to identify your shortfalls and how best to cover them.
If you have some cover, either personally or through your employer, you should get advice to see if there is any need to fill any protection gaps. Is it better to get a lump sum, a short term income or long term protection to see you through to retirement?
The risk of suffering increases with age, but so do premiums, so the earlier you put in place a policy the better off you could be.
The cost of professional independent financial advice for financial protection is often relatively low, with no upfront fees charged because insurers typically pay a commission to the adviser, which normally covers the full cost of their expertise.
If you think you’ll do it later, it might be too late. Many people only think about insurance when they need it, but by then cover won’t be available. You need it in place while it is relatively cheap and available (i.e. while you don’t need it).
If you think the state will help, think again. Government cut backs mean we all have to look after ourselves to a greater extent.
For example, the Chancellor is reintroducing the 39-week waiting period for ‘Support for Mortgage Interest (SMI)’, where mortgage payments cannot be made because of illness or unemployment, and the individual is in receipt of income related welfare benefits.
Those with longer memories will remember that SMI with a 39-week waiting period was in place before being reduced to 13 weeks in 2008 as a result of the financial crisis.
The reintroduction was discussed in papers published by the Coalition in early 2013, but not implemented at that time. This change will take effect from 1 April 2016.
In addition, from April 2018 the nature of this help will change.
Rather than being a non-refundable benefit, the sums paid by the state will become a loan, and interest will need to be paid on the debt as well as the outstanding capital amount. This gives claimants two options; firstly to repay the debt when they return to work, or alternatively to sell their home to repay the debt.
Currently those that qualify for SMI will get help paying the interest on up to £200,000 of their loan or mortgage. If they are in receipt of Pension Credit the figure is £100,000, and the benefit is limited to two years for those who started to get SMI after 5 January 2009.
But what does this mean for borrowers? Those who are likely to be affected will have high loan to income ratios.
This also re-ignites the need to protect on-going mortgage repayments, either by accumulating savings to cover any loss of income (self-insuring), or using the protection products available such as accident, sickness and unemployment cover, options on mortgage protection products or more comprehensive income protection.
Policies need to be sourced carefully and your needs and eligibility for that cover clearly ascertained at outset and for the foreseeable future.
You must also be made aware that if your circumstances change, for example they change jobs or become self-employed, there will be the need to re-visit the appropriateness of their cover otherwise you may no longer be eligible for some types of cover.
Details of SMI are available by clicking here.
This article was written on 19/11/2015 by Daniel Weldon, Independent Financial Adviser at Astute Money Management Ltd (www.astutemm.co.uk)