“I’m a single home owner with a mortgage, is it necessary to have life insurance. Couldn’t they just sell the house to repay the mortgage lender?”
Although this seems quite logical there are a number of points to consider.
- The loan to value of your mortgage
- Critical illness cover
- Income protection
- Future plans
Loan to value
The loan to value is the amount of your mortgage compared with the value of the property. This is usually determined as a percentage rate, being the loan amount divided by property value. If the loan to value is high (in the 90% range) then there could be a serious risk of the property falling into negative equity. Negative equity is when the value of the property falls below the amount owed to the mortgage lender.
The consequences of negative equity is that if a forced sale is called then the lender would sue for any amounts falling short. If the forced sale was due to your death then the lender could take legal action on your estate and next of kin. In addition if no Will is available then the could be a huge delay whilst going through probate, resulting in the lender adding months and months of interest, your next of kin could end up with a large bill.
Critical illness cover
Even if you’re on your own and either happy that your loan to value is sufficiently low, or you already have life insurance in place to cover a mortgage loan, one key area of protection is critical illness cover. A protection policy helping you directly if you were to suffer one or more of a list of specific serious conditions such as cancer, heart conditions, stroke and many more. Its very easy to think that these things won’t happen to a 20, 30 or 40 year old but research from Aviva insurance shows that there are more claims on critical illness cover from the 30-40 and 40-50 year old’s than the 50+ age group. However, a critical illlness can effect anyone; CLIC Sargent is a charity caring for children who have suffered cancer.
Critical illness insurance provides on diagnoses of one of the qualifying conditions a lump sum amount, the sum assured. The cash lump sum can either be used to repay any outstanding loans including the mortgage or to improve your life allowing you to adapt the condition. Lets say for instance that you are involved in a road traffic accident and the consequences are that you lose a limb.
Obviously this is a life changing condition and could have an impact on your job, you may therefore be unable to work and then pay your mortgage payments. Or you may need to make some radical alterations to your home to be able to move around with a wheelchair. With critical illness cover a claim would result in the sum assured being released, this could massively improve your lifestyle whilst you adapt to your serious illness.
Critical illness cover provides suitable protection if you’re diagnosed with one of a list of serious illnesses but what if you fall sick with a less serious illness, or are forced to go under a series of tests to identify a problem? You may even suffer from a disabling illness which prevents you from performing your work and earn a living.
Income protection or sometimes called permanent health insurance is an insurance product which could replace your income for a long period of time whilst undergoing tests or recovering from an illness or even replace your income right up until retirement if your unable to work due to a debilitating illness. On making a claim, the insurance provider would pay a monthly income allowing you to maintain any payments on a mortgage, bills, food, but check your policy as the cheapest life insurance options rarely cover this. So you can concentrate on making your recovery in good time without the financial strain.
Of course, if your long term plans are to get married and start a family but your immediate situation is different then it is always worthwhile reviewing your situation regularly. However, please bare in mind that life insurance and critical illness cover premiums do increase the older a person is so obtaining this earlier in life may well be cheaper.