Drop in protection cover leaves mortgage holders exposed | Financial Reporter

Drop in protection cover leaves mortgage holders exposed | Financial Reporter

Scottish Widows warns that an increasing number of mortgage holders are financially exposed as levels of protection cover drop.

Around 14.5 million UK adults over 18 have a mortgage but only 50% hold life cover. Those who don’t could be at risk of losing their home if the unforeseen were to happen.

This is set against a backdrop where nearly a fifth (19%) of mortgage holders said they had no idea how they would cover their household bills if they or their partner were unable to work due to incapacity, serious illness, an accident or death. A further 48% said their savings would last just a couple of months at the most.

Mortgage holders are also at risk of over-estimating the support they would receive from other sources, including their employer and the state. Sixty-four percent believe their employer will pay them either a full salary or a full salary followed by a partial salary if they are off work for a long term.  The reality is that people may be eligible for Statutory Sick Pay at £87.55 for up to 28 weeks.  Employees may also be entitled to Occupational Sick Pay, a payment made over the level of SSP, dependent on a company’s policy and often their length of service.

This situation is compounded by reported household expenditure for this group increasing by over £65 a month in the last year. Mortgage holders now spend an average of £1,393 each month on household costs, compared to £1,326 in 2013.  Financial resilience could further be impacted if interest rates rise, potentially pushing an increasing number of mortgage holders into severe difficulty, including a high number of first-time buyers who have never experienced a rise in rates.

Protection cover amongst mortgage holders has dropped since last year with only 50% currently owning life insurance, compared to 54% in 2013.  Furthermore, just 17% of mortgage holders have critical illness cover, down from 20% in 2013 and 7% hold income protection, a drop of 3% since last year, according to the latest Protection Report from Scottish Widows.

Richard Jones,Director, Annuities, Bancassurance and Protection, Scottish Widows said: 

“Protecting a home is about protecting a way of life that encompasses family, community and often a business. With this in mind, the impact of losing a home could be even greater than we initially realise. Whilst affordability cannot be ignored, people with mortgages do need to review and develop a more robust plan to ensure they are protected should the unforeseen happen. It’s all about making sure you have the right cover at the right time of your life, giving people the peace of mind that their families will be able to keep their home and be financially covered come what may."

www.belcapinsurance.co.uk

Differences between LTA and DTA (Discuss)

Questions I often get asked is what are the similarities between level term insurance and decreasing term insurance and what are the differences.

They are both types of life assurance and they both payout a lump-sum if you were to die during the term of the policy. The main difference between the two is that level term insurance remains (as the title suggest) level so if you are insured for a £100,000 pounds for 20 years the policy would payout £100,000 pounds should you die at any time during the 20 years. 

The decreasing term insurance (as the name decreasing might suggest) decreases over time so if you started off with £100,000 pounds over 20 years with full cover on day 1, by the end of the term the policy that would be reduced down to zero.

The main usage for decreasing term insurance is to protect a payment of a repayment mortgage (capital and Interest). That is the type of mortgage where you pay some capital and some interest each month so by the end of the term you owe nothing. So your life insurance needs to mirror that repayment schedule of your mortgage loan.

One positive about decreasing term insurance is the premiums are lower because as you get older and your chance of dying gets higher the level of cover reduces so the premium is lower.

So, to recap, Level Term Assurance remains the same sum assured throughout the policy term and is generally used to provide life cover to pay a lump sum to your beneficiaries should you die (family insurance cover). Decreasing Term Assurance is generally used to cover a loan such as a mortgage. Level is more expensive than decreasing.

Oh, by the way both type of policies really need to be written in Trust. To know why please visit http://belcapinsurance.co.uk/uncategorized/life-assurance-trust/

Income Protection Plans (IPI)

If you couldn't work because of a long term illness have you thought about what you would live on? State benefits are not a real long-term solution (assuming you qualify in the first place). But you can buy an insurance policy that will pay a percentage of your income if you are off work due to illness and it is called income protection.

Income Protection Plans can offer you great benefits when they are really needed.

So what would you look for? Well the first thing is to look for guaranteed premiums. Now these are premiums that are guaranteed not to rise during the term of the policy and without guaranteed premiums the insurer can increase the premiums and the rise maybe quite substantial. Policies that have potential to change monthly costs are known as Renewable premiums

Guaranteed premiums may be more expensive in the early days but are very likely to save money in the long term. You should also check what you have to do in order to make a claim.

Obviously, an acceptable budget will play a major part of any advice process.

Some policies will pay out if you are unable do your own job or a similar one and these are the best kinds of policies to have, others will only payout if you fail a series of tests designed to assess what you can do and in some cases you have to be very ill indeed to trigger a payout.

Before you buy a policy you should check and see if you can get income protection through your work as part of your employee benefits. However, with employee benefits there is usually a maximum time that you could rely on receiving the benefits. Check and double check what your employer offers. It goes without saying you should take advice from a professional broker unless you know exactly what you want.

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