What Insurance Will You Need With Your Mortgage?

Your mortgage is possibly the biggest expense you will meet in life, but what happens if you can no longer repay it? Here is a guide regarding the types of insurance that can help you settle your mortgage.

What will you need?

There are four types of insurance that you should consider when taking out a mortgage:

  1. Life Insurance: availed to cover the cost of paying off your mortgage, if you die before it is paid off.
  2. Critical illness cover: availed to help cover the cost of paying off your mortgage if you get diagnosed with a life-changing condition.
  3.  Buildings insurance: availed to cover the rebuild costs if something happens to your home.
  4. Income protection: availed to help cover your mortgage payments each month if you are not able to work because of an accident, redundancy, or sickness.

Buildings insurance

This type of insurance is usually required when you have a mortgage and could save you a lot of money if something damages your home, like a flood or fire.

Without building insurance, you would need to foot the bill of the rebuild of your home, and pay your mortgage at the same time.

Life insurance

If you die during the term of the policy, a life insurance policy could pay off your mortgage. There are two types you could  weigh in on:

  1. Level term life insurance: If you die during the term of the policy, this will pay out an amount that you have chosen.
  2. Decreasing term life insurance: You could avail this type of policy to lessen its payout at the same rate as your mortgage balance every month. Since the payout decreases every month, this will cost less than a level term policy.

See also: How to Claim a Life Insurance Policy

Critical illness cover

If you suffer a stroke or get diagnosed with a serious condition, like cancer, this kind of insurance pays out a lump sum.

Each policy has a list of conditions that it covers, and also a list of exclusions, so examine the terms before you buy.

There are three kinds of critical illness cover:

  1. Increasing cover: The premiums and payout amount increase with the rate of inflation every year.
  2. Level cover: The premiums and payout stay the same throughout the policy.
  3. Decreasing cover: Premiums are normally lower compared to level cover. However, the payout decreases every month. You can make use of this to follow your mortgage as it is repaid.

Some insurance companies let you add critical illness cover to a life insurance policy when you apply.

However, you do not normally get a better deal if you buy the two together, so shop around for both to discover the best cover for the lowest price.

Income protection

An income protection policy could pay you an income until you can work again after having an accident, becoming sick, or even becoming redundant.

These policies can cover up to a set percentage of your income. For example, 65%, or about to a fixed monthly amount of  £2,000.

You could look for a policy that lasts for only one year, or up to the date of your retirement. The longer the policy is, the more expensive it will be.

What is MPPI?

When you take out a mortgage, your lender may offer you a MPPI or a mortgage payment protection insurance policy.

This is similar to a standard income protection policy, so rather than accepting the policy your lender offers you, examine as many policies as possible to get the best price.

How to Claim a Life Insurance Policy

Who can claim the insurance?

A claim can be started by anyone. However, this does not imply if you are already entitled to a payout unless your name is included as a beneficiary of the policy.

Those closest to the deceased usually deal with all financial matters. If you are a close friend, you could start the claim on behalf of the family members.

To start, find out which company holds the life insurance policy, and call them.

SEE ALSO: Is Your Life Insurance In Trust?

Is there a time limit?

Life insurance companies do not draft a timescale, so you can begin a claim after a few weeks if you still need time to grieve for your loss.

When you call to initiate a claim, the insurer will have trained employees to sympathetically deal with your situation, making it a lot easier for you to begin a claim soon after the death.

What do you need to start a claim?

Normally, insurance companies will ask you for the following:

  • The deceased’s name
  • The reason for the death of the deceased (this is indicated at the of the death certificate)
  • The policy number for the life insurance
  • Your name
  • Your relationship with the deceased

The insurer will give you a claim form for you to fill-up, and a list of all the documents that they need you to send them so they can process the claim, a death certificate’s copy, for example.

Who gets to receive the payout?

This depends:

  • If the policy on life insurance was set up in trust: The payout will be given to a nominated person identified on the policy. This may not necessarily be a family member.
  • If the policy wasn’t set up in trust: This is the usual set up of most policies; the payout will be given to the estate of the deceased person, making it subject to inheritance tax.

What if your claim is rejected by the insurer?

Ask for the reason from the insurer, but the most frequent reasons for claims that are rejected are:

  1. Non-disclosure issues: This happens when the policyholder may not have given an honest account of their medical history or the medical history of their family.
  2. The policy had already expired: If the policyholder availed of a term life insurance, it would have lasted only for a set duration, 30 years, for example. If the policy term has already expired, you cannot make a claim.
  3. You have not provided the insurer everything they require: The insurer will be clear in what documents and information that it requires in order to process your claim. They could reject the claim if you cannot provide them with everything they need.

If you believe that the insurer unfairly rejected your claim, you can contact the Financial Ombudsman for help.