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Life Cover

Life Cover, or Term Assurance, aims to provide financial security for people who depend on you, or a family member, in the unexpected event of death.
Term Assurance is the simplest and cheapest form of life cover and is very common for protecting mortgages - especially for joint mortgage holders. It is known as term assurance because you simply choose how long you're covered for, such as 10, 15, 20, or 25 years (the term). If you die within this term the insurance company will pay out the amount of cover selected (sum assured) to your beneficiaries. If you live longer than the term selected then you receive nothing back, and it’s that simple.

Level Term

Level Term policies ensure that the sum assured is paid on death and remains the same throughout the term. When the term expires the policy has no value and simply ends. This type of cover is often bought to cover the repayment of liabilities, such as a loan or a mortgage. This cover is particularly suitable for interest-only mortgages where your balance remains level throughout the mortgage term.

Decreasing Term

Decreasing Term policies ensure that the sum assured payable falls each year until it is zero by the end of the policy term. This type of cover is often used alongside the purchase of a repayment mortgage, where your mortgage balance reduces every year throughout the mortgage term. The premiums on these policies are cheaper than for level term assurance as the amount of cover is always reducing.

Family Income Benefit

Family income benefit policies pay a sum assured on a regular basis rather than as a one-off lump sum payment. The sum assured is payable from the death of the policyholder, either on a monthly or yearly basis, until the expiry of the policy term.  This provides a cost effective way of replacing regular lost income to your family and is often bought to coincide with the expected period of dependency for young children. Policies may be arranged that will pay a level income or an income that rises by a pre-determined amount each year to keep check with living costs and inflation.

Convertible Term

Convertible term policies ensure that the sum assured can be converted, or extended, into permanent cover when your original policy term comes to an end. This type of cover is attractive to those who want the option to extend their cover regardless of their health at the point of conversion. These policies provide peace of mind that you will always have the option for more cover even if your health has deteriorated, with your current insurer. The drawbacks can be that you are restricted to the original sum assured and cannot increase the cover with your premiums being higher from the outset.  At the time of conversion these are likely to increase further as they are determined by age and the insurer’s risk related charges.

Renewable Term

Renewable term policies ensure that the sum assured can be exchanged for another policy at the end of the term. The big attraction is that you have guaranteed insurability and you will be insured - irrespective of your state of health - when you come to renew. Renewable term insurance is often offered as an option on convertible term policies, and vice versa.

Increasing Term

Increasing term policies ensure that the sum assured increases by up to 5% to 10% a year typically. These policies cost more than level term assurance but your benefits are protected against the cost of living, or inflation. The right to increase the sum assured typically ends when you reach age 65.
With all these different cover types you can include “Waiver of Premium” which ensures that your monthly policy payments are met, even if you are unable to work.

Critical Illness Cover

Critical Illness Cover (CIC) is an insurance policy designed to pay out a cash lump sum on the diagnosis of a specific life threatening or debilitating condition, such as heart attack, stroke, cancer, multiple sclerosis, or loss of limb. The specific illnesses covered will vary between insurers but these policies differ from life cover as they pay out even if the condition does not result in loss of life.

Many people opt to take out critical illness cover when they take on a major commitment such as a mortgage or other debts, but it can also be used as a safeguard for medical bills should one of the specified illnesses arise.

  • CIC pays you a lump sum if you are diagnosed as suffering from one of the specified illnesses
  • CIC is not designed to protect against general ailments that affects your ability to work – it is specific about which illnesses are covered
  • Some insurers exclude all pre-existing conditions, but others will decide on the basis of your personal medical history
  • Many insurers now provide a Plain English Guide to the illnesses covered so there is no misunderstanding when making a claim
  • If the insurer imposes any restrictions on cover, perhaps because of your personal or family medical history, you will be told what they are before you take out the policy
  • These policies usually only pay out once, so are not a direct replacement for income

With CIC policies you can include “Waiver of Premium” which ensures that your monthly policy payments are met, even if you are unable to work.

Income Protection

Permanent Health Insurance (PHI) may be the answer if you have lost regular income through sickness or injury. This type of policy is designed to maintain and protect your standard of living once employer’s sick pay finishes. The benefit payable usually starts after an initial waiting period of 4, 13, 26 or 52 weeks.  This usually coincides with the end of your sick pay entitlement, and it is payable until you return to work, retire, die or the policy term expires - whichever happens first.

These policies are often referred to as permanent because the insurer cannot cancel the policy no matter how many times you claim throughout your pre-selected term.  Most insurance policies will pay you a reduced benefit even if you return to your normal occupation in a reduced capacity, or take a lower paid job elsewhere.  The maximum benefit is normally limited between 50 to 65% of your before-tax earnings as an incentive to return to work eventually.

A number of factors can influence the size of premium you pay:

  • Occupation - Most insurance companies recognise four occupation grades. These can range from Class 1 (typically administrative or professional occupations) representing the lowest insurance risk and cheapest premiums. In contrast, Class 4 comprises people whose work involves heavy manual labour and are seen as higher risk. Some occupations, such as steeplejacks, will not be able to obtain this cover.
    If you start a new job within a different “occupation class” some insurance companies will continue to provide cover, whilst others may cancel it. It is vital you tell your insurance company if you start a new job.
  • Waiting period - If you can afford to select a longer waiting period before benefits become payable (deferred period), it will mean lower premiums, but ultimately will mean you having to rely on family or savings during this period. A policy with a 13-week waiting period will typically charge lower premiums than one with a four-week wait because the insurance company takes on less risk in having to pay the benefit. The waiting period chosen should ideally tie in with the end of your sick pay entitlement. But there's no point opting for a long waiting period if this causes financial hardship.
  • Payment period - The period of cover, and how long you require the policy to pay benefits for will affect the premiums. Most policies can cover you up to 65 years of age or normal state retirement age.  However, if you are looking to have cover for mortgage payments only and this ends earlier, then selecting this shorter term will reduce cost. The shorter the payment period the cheaper the premium will become in most cases.
  • Smoking - Non-smokers pay less for their cover as the likelihood of smoking related illness and time of work reduces.
    With PHI policies you can include “Waiver of Premium” which ensures that your monthly policy payments are met, even if you are unable to work.

Buildings Insurance

Buildings Insurance simply looks to cover the structure of your home and potentially re-building your home from start to finish again, should it be destroyed. It usually pays out if your property is destroyed by fire, floods or subsidence as these are the most common risks. Damage to fixed fittings such as baths and kitchens are often included as well as extended cover for sheds, greenhouses, garages and swimming pools. A good buildings insurance policy should aim to cover you for fire, subsidence, storms, floods, lightning, theft, vandalism, escape of water or oil, damage caused by falling branches, or other objects hitting your property.

If you have a mortgage then your lender will insist that your property (and their security) is protected by an adequate buildings insurance policy.  If you are purchasing a freehold property then in most cases you will be liable for arranging cover.  If you are looking to purchase a leasehold property (such as a flat in a block), the freeholder may have pre-arranged buildings insurance for the whole block rather than insure flats individually - meaning you don’t need buildings cover.

The level of cover required is based on what your home would cost to rebuild from scratch, and not your homes open market value which can differ. You can check whether you have adequate cover by referring to a recent valuation report on your property.  This will normally state a re-build cost, but if still unsure about cover levels needed then some insurance companies offer unlimited cover on their policies.
Most insurance companies allow premium payments to be paid monthly or annually. If you are offered a monthly option, check whether the insurer charges extra for the privilege of spreading the payments over the year. In most cases paying in one go works out cheaper, but this is not always the case.  Another way of keeping premiums lower is by increasing your standard excess charge which means you agree to pay the first part of any claim.  If you agree to pay a higher excess you may get a cheaper policy, but always check cover levels offered rather than just relying on premiums when selecting cover.
For buildings and contents insurance Think of Mortgages Ltd acts as a credit broker not a lender

Contents Insurance

Contents Cover provides protection against the loss or damage to the contents at your home, or basically everything you could take with you if you were to pack up all your belongings and move home. This list of contents typically includes your furniture, household goods, food and drink and other items within your home, up to a pre-selected cover limit. Items you take outside, such as cameras, laptops, bikes, jewellery and briefcases can also be covered but is likely to result in an increased premium. Different policies offer different levels of cover but in general most policies provide protection against fire, theft and have the option to insure against accidental damage to your contents.
Unlike buildings insurance mortgage lenders won’t insist you take out contents cover, and you need to organise it yourself if you feel it is necessary.
Calculating the levels of cover needed, or the total amount of money for which your contents are covered can be difficult. The cover level selected is the maximum your insurer will pay even if your possessions are worth more if damaged - so it’s important to get this figure right from the outset.  Calculating the amount correctly can vary between households but the estimate for a typical home is thought to be approximately £45,000. Sometimes it may be necessary go through every room and write down what it would cost to replace every item at today's prices. If still unsure about the level of cover needed, then some insurance companies will offer unlimited cover meaning you don't have to worry about calculating an exact replacement cost.
Most insurance companies allow premium payments to be paid monthly or annually. If you are offered a monthly option, check whether the insurer charges extra for the privilege of spreading the payments over the year. In most cases paying in one go works out cheaper, but this is not always the case.  Another way of keeping premiums lower is by increasing your standard excess charge which means you agree to pay the first part of any claim.  If you agree to pay a higher excess you may get a cheaper policy, but always check cover levels offered rather than just relying on premiums when selecting cover.
For buildings and contents insurance Think of Mortgages Ltd acts as a credit broker not a lender.

Mortgage Payment Protection (MPPI)

This is also sometimes referred to as Accident, Sickness and Unemployment Cover (ASU). A typical policy will start to pay your mortgage payments and essential household costs, one to three months after your income stops due to involuntary redundancy, accident or illness.  These policies typically payout for 12-24 months only and this means that after this period expires you will have to pay your monthly mortgage payments yourself.

To make a claim on these policies most providers insist you have been continuously employed for a minimum period, typically between 3 to 12 months on a permanent contract.  Those that are self employed may find these policies to be unsuitable, as it becomes difficult making a claim for unemployment benefit unless your business totally ceases trading (it is important to read the policy summary carefully before selecting).  Always check to see what you will and won't be covered for as any exclusions or limitations relating to the nature of your employment or medical history, can affect claims for accident, sickness or unemployment cover.

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Thinkofmortgages.com is a trading style for Thinkofmortgages Ltd, which is an appointed representative of Personal Touch Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority. Think of Mortgages Ltd acts as a credit broker not a lender.
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* We normally do not charge a fee for mortgage advice, however a fee paying option is available. Our typical fee would be £399

 

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