Mortgage Protection

Do I need critical illness cover? 

Again you need to take advice on this, but in essence it will pay out a set sum for a specified critical illness, in line with the policy wording. You could receive a fixed sum, or if it’s a mortgage-related critical illness policy, the amount paid out will decrease in line with your mortgage. Typically they assume that the interest rates are around 8%, and that’s how they’ll decrease over time. Obviously rates are still much lower than that, so the policy is decreasing slower than you’re paying your mortgage off and there’s never a deficit. 

The insurance pays out for a specified critical illness – and this is really important because the only way insurers can make a critical illness policy cheaper is to reduce the likelihood of paying out. So they might reduce the number of critical illnesses that are covered or state that critical illness must reach a more severe level before it triggers a payout. 

To explain: some critical illness policies will cover blindness, and how they define blindness will vary. Some will require that you can’t see anything – just blackness. Others will require that you can’t read letters of a specific size from a specific distance. 

So some policies are easier to get a payout on than others. It’s a really complex area because the insurers have set criteria. Brokers dealing with critical illness insurance will have a good understanding of the levels of cover and which companies are better for critical illness. 

There still needs to be a conversation around cost and budget. If everyone took what the FCA suggested, it would probably be unaffordable on a monthly basis. A good advisor will have that conversation with you, and it’s now part of FCA consumer duty legislation – because otherwise, if something goes wrong you could lose your home.

How does critical illness differ from life insurance and income protection?

Very typically critical illness and life insurance are joint policies and there’s a reason for that. Say an individual has a stroke and survives, that critical illness policy would pay out if the stroke was sufficiently serious. 

However, if that stroke kills the individual, a critical illness policy would not pay out. Whilst a critical illness could completely change your life and may eventually kill you, it shouldn’t kill you instantly. Most policies say you need to survive for 14 days on being diagnosed with that critical illness, otherwise it would be a life insurance claim.

Why is life insurance so important?

Life insurance isn’t a policy we take out for ourselves – it’s to protect those that we care about. Something I often say to clients is that we hope the mortgage protection that we arrange for people is a complete waste of money, and that they never need to claim on it. 

If they do, it means something has gone dramatically wrong in their lives.

If you have a joint mortgage, you need to put insurance in place to protect the people left behind. It’s not just to settle the mortgage. If you have children and a family, they don’t just lose an income, they lose what you’re providing to the family in the form of childcare and other support, and that will completely change the dynamics.

Your partner may not be able to work as much and will need their income topped up. That’s where the family protection side of the conversation comes in. Yes, the mortgage is paid off but is there enough income to pay all the bills? 

So there’s lots of conversations that need to go on and this needs to be taken seriously by people taking out debt. A professional advisor will walk clients through this insurance journey, establishing their needs and priorities and making suitable recommendations.

Can you combine policies? How does that work?

It’s common to combine life insurance and critical illness. Some people will still separate those because if they did get a critical illness, a joint policy will only pay out once. So you can separate them within a plan. 

Using my previous example, if you had a stroke the critical illness policy will pay out. Then if a year later you die, the life insurance will pay out. Once you’ve had a critical illness you will find it exceptionally difficult to get a life policy, so it can make sense to separate them.

Income protection is never really joined with any other products, but they can all be under one plan. You don’t have to go to the same insurer. What could be most beneficial for an individual is based on the type of job they do. An income protection policy might be better with Insurer A, but the best critical illness policy might be with Insurer B – and that’s no problem. You can go with separate insurers within the same protection plan.

How much should I budget for mortgage protection?

It’s tricky to give a generalised answer, but  when you’re looking at how much you’re spending a month on your mortgage, you should already be thinking how much to spend on mortgage protection. It shouldn’t be an afterthought, and should be part of the very early conversations with your mortgage advisor. 

I suggest people look at how much they’re spending on other things to get some context. For example, we’ll go through people’s bank statements and they might be spending £40 on takeaway coffee each month, or £80 a month for their phone contract. Cutting back on those would give you a decent budget to put towards protection. 

But of course the budget required to adequately protect yourself is going to be different if you have a £100,000 mortgage compared to a £1 million mortgage. So another approach is to look at whether 10% of your mortgage payment is affordable. If your mortgage is £800 a month, then spending £80 a month on protecting your home is a good place to start a conversation about budget.

The costs of these policies are risk related. If you’re 20 years old and taking a 25 year life insurance policy, the likelihood of you claiming on that is low. But that doesn’t mean you shouldn’t have it. Statistically speaking, 50% of the UK population will have a critical illness by the time they’re 65, so the older you are and the closer to 65, the more likely you are to claim. That’s why I would encourage younger people, who maybe see less need for them, to take out protection. It is much cheaper to take policies out earlier in your life.

What else do we need to know about mortgage protection?

With new changes to consumer duty legislation, mortgage applicants are going to see some changes in the processes they go through. Brokers will need to document the conversations they have about protection. There will be people that are defiant about not taking any form of insurance. They might not agree with it, but they will no longer have the choice not to have these things explained to them to understand the consequences. 

To be fair, most competent brokers are very client-centric and switched on around these real needs for their clients. For them, the process won’t change much, but the documentation on the backend may increase a bit. 

These conversations are not ten minute chats. You can’t establish someone’s requirements and make recommendations in that time. You need to sit down for an hour or so and really get into what’s important.

[Episode recorded in January 2023]

As with all insurance policies, conditions and exclusions will apply.

The cost of this insurance depends on several factors, such as your age, where you live and your occupation. As a result, the cost you will pay is based on your own circumstances.