How income protection insurance and critical illness cover can help you make mortgage payments if you fall ill or are unable to work.
It’s a difficult topic, but the COVID-19 pandemic has underlined how protection can provide peace of mind that your mortgage and other bills will be paid if you are unable to work or pass away.
According to the Association of British Insurers, life insurers alone paid out a hefty £90 million in claims between 1 March and 31 May to help families cope with COVID-19 deaths, with part of this sum no doubt used to pay off outstanding mortgages.1
After all, purchasing property is often the biggest financial decision we make in life, and even a temporary reduction in income can affect our ability to pay off a mortgage.
“If you are off work ill, for example, you may be able to claim state benefits, but these aren’t necessarily going to cover your mortgage payments,” notes Paul Johnson, Client Banking and Mortgage Manager at St. James’s Place.
Do I need critical illness and income protection?
Not all protection is considered equal, and what’s right for you will depend on your individual circumstances, which is where professional financial advice can help. Different types of insurance include:
- Life insurance, which pays out a lump sum on death. This could be used to pay off a mortgage and provide an additional amount of money for your family, depending on your level of cover. Whole of life cover runs for your lifetime, while level term insurance runs until you have repaid the mortgage. Or you may opt for decreasing term insurance, which covers you for a fixed period, such as 10 years, with the level of coverage decreasing over the life of the policy at a set rate.
- Income protection, which provides you with a tax-free income if you’re unable to work due to an accident or illness for a long period. The amount of cover varies depending on your plan, and usually kicks in after a certain period – say, six or 12 months. It can run for several years, until you return to work or even until retirement.
- Critical illness policies, which pay out a lump sum if you’re diagnosed with a condition covered by your plan, such as a heart attack, stroke or cancer.
There are other types of cover that can be useful in times of crisis, such as rent insurance, which covers rent payments if a tenant is struggling to meet these.
Finding the right protection policy – and regularly reviewing it
Paula Read, Head of Protection Proposition at St. James’s Place, says: “Income protection and critical illness cover can be equally important and bundled into a multi-part plan.
“If you suffer a heart attack, for example, you may receive a payout from a critical illness policy, but if you’re off work with a long-term illness, your mortgage payments can still be met via income protection. If you have a family, then life cover is also important to ensure full protection.”
Whatever cover you have, it’s important to review your policy to ensure it continues to meet your needs. Johnson says: “If you have life cover on a decreasing term, for example, beware that this may not be sufficient to cover your mortgage if you move or remortgage.”
He adds that it’s worth checking your life cover is structured efficiently. For example, if it’s set up in a trust*, payment stays outside your estate for Inheritance Tax purposes.
“Similarly, with income protection, you might change jobs and find the policy won’t pay out, or an employer’s cover may make your personal policy redundant,” he adds.
Your St. James’s Place Partner can help you to build a protection plan that is individually tailored to meet your needs, and adapt it to your changing circumstances with regular reviews.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
*Trusts are not regulated by the Financial Conduct Authority.
1Association of British Insurers, “Insurers pay £90 million to help families cope with Coronavirus deaths”, August 2020