Taking out a mortgage is complicated enough for the uninitiated, but you will also have to prepare yourself for the raft of mortgage-related insurance products you will be offered at the same time. Although you are under no obligation to take any of the products from your lender, it is helpful to arm yourself with the basics before you get your mortgage.
Buildings insurance
What does it cover?
The devastation caused by the recent flooding in Gloucestershire is a very real example of the purpose of buildings insurance. This type of cover protects the structure of your property should it be damaged by events such as fire or extreme weather like flooding, winds and even lightning.
How is it charged?
The premiums you pay will be based on how much the property will cost to rebuild rather than the economic factors of house prices. So the rebuild cost of an end-terrace three-bed home will be pretty much the same whether it is based in Mayfair or Macclesfield. You can estimate your homes rebuild cost using the calculator on the Association of British Insurers website at www.abi.org.uk.
What are the exclusions?
Weather damage to fences and gates is typically not covered, and if you have been away from home for over a certain time period, say 40 days, claims will also be invalid. The excess payable on claims for subsidence will be in the region of £1,000.
Do I need it?
Yes everybody does. If you have a mortgage, buildings insurance is compulsory as your home constitutes the security for the lenders loan. If you are buying your first home, the lender will want to see that you have buildings cover in place before it releases the advance, says Malcolm Tarling at the ABI. If you live in a block of flats or a housing association property you may find that buildings insurance is included within the service charge. Check before you take it out.
Contents insurance
What does it cover?
If you could pick up your home and turn it upside-down, everything that fell out would come under contents insurance, although usually the buildings and contents policies are sold alongside each other and called home insurance. On its own, contents insurance covers damage, theft or loss of your homes contents.
How is it charged?
Most insurers simply ask you to tot up the value of what it would cost to replace all items not, of course, what they are worth now and offer cover for that amount. Several insurers now dont have a cap on general cover at all; they will just ask you to declare items over a certain value separately, says Tarling.
Your postcode area and the security of your home a working alarm and five-lever mortise lock for example will also determine your premiums, which can be paid monthly or yearly.
What are the exclusions?
Again, if your home is vacant for more than
40 days, you may not be covered for contents or if you have left yourself open to a theft by leaving doors unlocked.
Do I need it?
Unlike the bricks and mortar of your home, which represent your mortgage lenders security, contents are your own personal possessions, so its your call. However, if you were burgled or flooded, the items that took a lifetime to accumulate would have to be replaced in one fell swoop.
Life insurance
What does it cover?
As it says on the tin, life insurance covers your life. So if you die, a lump sum is paid out to the beneficiaries, which will usually be your family. Decreasing-term life insurance covers only the outstanding balance on your mortgage so the payout will decrease every year. This product therefore only works in tandem with a repayment mortgage. Level-term cover pays the same throughout the policy.
To coincide with a typical mortgage term, life insurance premiums are payable for 25 years. If you survive during this time and pay off your mortgage, you will be back to square one with your life intact of course.
How is it charged?
The amount you want to cover or the amount paid out on death is called the sum assured and could be in the region of £250,000. The monthly premiums you pay for this sum assured will be priced quite coldly on the likelihood of your dying within the next 25 years. This will be based on your sex, health (such as if you are a smoker or overweight), occupation and family medical history.
What are the exclusions?
There are no grey areas between being alive and dead, so in turn life insurance comes with no standard exclusions. However, if you commit suicide, your family will have to wait until 12 months have passed from opening the policy to receive the payout.
Do I need it?
If you are a young, single homeowner with no dependants and struggling to make ends meet, there will be more useful insurances than life insurance, says Kevin Carr, head of protection strategy at IFA LifeSearch. Of the two Ds you need to think about, it will be debts rather than dependants.
For a childless couple living together, you will need to think how the other would survive paying the mortgage on one income. Life insurance could be a good idea for the highest earner, or you could take a joint policy where payment is received on the first death.
If you have a family, life insurance is a must. During such a traumatic time, the last thing your family will want to think about is working more hours, the cost of childcare or even selling their home.
What is a whole of life policy?
These are policies that dont have a term they run until you die, whatever age that may be. But of course, as dying under this policy is certain, premiums are significantly more expensive. Some policies include an investment element where the premiums increase over time.
Critical illness insurance
What does it cover?
The ABI lists eight core conditions that all insurers must cover, which include cancer, multiple sclerosis, kidney failure and major organ transplant. Additional conditions covered include blindness, loss of limbs or third-degree burns. As with life cover, you choose a sum assured and pay every month during the course of your mortgage. In the devastating event you have to make a claim, you will be paid your chosen sum assured as a lump sum.
How is it charged?
Like life insurance, critical illness is priced on your health at the time of taking the policy and will then be charged monthly. If you stop making the payment, cover will cease after 30 days. And if you leave an existing condition off your application, you may get nothing on claiming.
What are the exclusions?
The exclusions to critical illness insurance are even grimmer than the illnesses themselves. For a successful claim, your illness will have to meet the insurers own definition. So a stroke might have to result in permanent symptoms, cancer should have reached beyond early stages and a heart attack might mean part of your heart has to die. Self-inflicted injury and AIDS/HIV are also usually excluded from the critical illness policies.
Do I need it?
In insurance terms and arguably in life terms too the worst thing that can happen is that you contract a critical illness and continue to live, says Harrison, chief executive of price comparison website Insurancewide.co.uk. Not only can you not earn, you will become expensive [as you will need carers and equipment].Therefore, whatever your position in life, critical illness insurance is a very good idea.
Mortgage payment protection insurance (MPPI)
What does it c
over?
First off, MPPI is not to be confused with mortgage protection insurance (MPI), which will pay off just your mortgage if you die (basically MPI is another name for the decreasing-term life insurance).
Instead MPPI covers your mortgage repayments each month, in the event of your becoming sick, having an accident or losing your job hence the policy is also sometimes referred to as ASU (accident, sickness and unemployment).
Payment protection insurance (PPI) is effectively the same product but minus the mortgage is just designed to cover loans and credit card repayments.
What are the exclusions?
With these products, there are plenty. In fact, only 15 per cent of the money paid in to policies is paid out to customers, according to the Office of Fair Trading. MPPI typically excludes pre-existing conditions as well as new conditions if they are stress- or back-related despite the fact that these are problems that account for two-thirds of all claims.
Bear in mind also that MPPI and PPI are any occupation policies, which means that it will only pay out if you are unable to work in any job at all, not just your previous occupation.
If you do qualify, MPPI will pay out for a year, but typically after an initial deferment or excess period of between 30 and 60 days. Terms and conditions can also be changed with 30 days notice.
How is it charged?
These products are one price fits all insurances. They are charged per £100 of cover a typical rate is about £5 per £100. This means that if your mortgage repayment is £1,000, MPPI will cost you £50 a month.
Do I need it?
This depends on your circumstances and access to cash if things took a turn for the worse. If you are a home-owning singleton in your 30s with a steady job, it could be a good idea, says Harrison. You have to think what you would do if your income suddenly dried up. But bear in mind that it is not a cheap insurance, you will still be stuck for the initial deferment period and payments will stop after a year if you have savings, its best to use them first.
For a childless couple living together one income may support the absence of the others and MPPI payments would be wasted, which is the same situation that applies to a family. Look carefully at your own circumstances as well as other insurance options as MPPI could be an expensive and unnecessary security, says Carr.
Income protection
What does it cover?
Income protection, also known as income replacement and previously referred to as permanent health insurance (PHI), covers your income if you are unable to work through ill health. It does not cover unemployment. Unlike MPPI, it will pay out until you either retire or can perform your original job again. In addition, terms and conditions of the policy cannot change from the day it is taken out.
How is it charged?
Your monthly premium will be set according to your specific circumstances using four key criteria of sex, age, health and job.
What are the exclusions?
As the policy is specifically underwritten there are no exclusions. Pre-existing conditions will simply be reflected in your premium.
Do I need it?
Carr recommends that single first-time buyers reliant just on their own income should look at income protection before MPPI. If you are young and fit it is often cheaper, he says, and as long as your industry is relatively secure, you can self-insure on the unemployment side by putting the money in the bank. If you are in a shrinking industry, however, MPPI could be the best bet. Families and couples may be more likely to be able to cover others costs should they be unable to work.
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