With a mortgage, the major concern for most people is what would happen to that debt, and more importantly their home, if they were to pass away.
That’s not surprising given that more than one in four Brits has an outstanding mortgage in excess of £100,000 to repay.
Mortgage life insurance puts people’s minds at rest so their loved ones can stay in the family home debt-free should the worst happen.
Adding Critical Illness Cover (CIC) can provide insurance against the risk of serious illness too, but even so, is this enough?
The reality is that individuals are far more likely to get ill than die.
Even if they were diagnosed with something sufficiently serious to warrant a critical illness payout, and many things that could stop them working aren’t critical such as bad backs, what happens then?
The mortgage would be repaid, but could they actually afford to live in the home? The responsibilities that come with homeownership, such as insurance, council tax, utilities and other bills, all add up.
Although less well understood, Income Protection (IP) offers clients monthly benefits if they can’t work due to accident or sickness.
This can cover not just mortgage repayments but other expenses, too. The best Income Protection pays out long-term, so clients could potentially receive monthly benefits for the rest of their mortgage term.
CIC or IP?
While it might be tempting to opt for cover that repays the mortgage entirely, this may not be sufficient.
Furthermore, Critical Illness Cover doesn’t pay out unless the illness is critical, even if it’s nonetheless debilitating, such as a mental health problem.
In an ideal world, clients would have both Income Protection and Critical Illness Cover, but budget doesn’t always permit this. In which case we generally favour Income Protection given its wider scope of coverage.
Expenses on top of the mortgage would also have to be met if the mortgage holder died.
The mortgage may be repaid, but what about day-to-day living for the family left behind?
Telling a FIB
A subset of life insurance, known as Family Income Benefit (FIB), can provide ongoing payments to a mortgage holder’s loved ones after their death.
Rather than being a lump sum, the benefit is spread out as monthly payments and can be used to cover other daily living expenses, from grocery shopping to school fees. Policies typically run until the youngest child reaches adulthood.
Often these benefits work best in tandem.
Combining Income Protection with FIB would ensure continuation of income for the household in the event of both the policyholder’s illness and death, for example.
As advisers, it’s our responsibility to consider our clients’ protection needs as a whole, using all the tools in the toolbox, and that means looking wider than just life insurance with Critical Illness Cover.