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Mortgage and income protection: Which insurance is right for you?

Paloma Kubiak
Written By:
Paloma Kubiak

Homeowners are urged to consider taking out insurance to cover their mortgage payments and household bills were they to fall ill or be unable to work.

It comes amid a cost-of-living crisis that has seen households across the country struggling to cover the cost of the mortgage (see below for your options here), weekly food shop and sharply rising energy and fuel bills.

But independent adviser, Anderson Harris, says mortgage protection insurance is cheaper than most people realise and can be a lifesaver in the event that the family breadwinner finds themselves unable to work due to illness or, worse, death.

Adrian Anderson, director at Anderson Harris, says: “The purpose of the insurance is to ensure that the family can continue to meet mortgage payments in that situation.

“Covid aside, the NHS warns that one in two people will get some form of cancer during their lifetime, while heart disease is responsible for one in four premature deaths.”

He adds: “Many people don’t think twice about taking out travel insurance or insuring their pets. Fewer take out insurances that can protect their mortgage payments, but the peace of mind that doing so can provide is immense. During tough economic times, this can be particularly reassuring.”

There are several different types of insurance that can offer a financial safety net should there be a sudden change in the policyholder’s ability to earn. We take a look at what you can get and how much you should expect to pay.

Mortgage protection

Mortgage protection is designed to cover your mortgage payments if you’re unable to work for a specific set of reasons. These vary depending on your policy terms and conditions but the most common is accident, sickness and unemployment insurance. A cheaper option is to take a policy that covers either unemployment or accident and sickness.

It tends to be the cheapest insurance if you want to make sure your mortgage is covered while you’re off work, but it’s worth noting that you’ll only receive payments for either 12 months or 24 months depending on the length of policy you choose.

It also won’t provide you with any other income to pay for bills and to cover other debt repayments you might have.

Monthly premiums can be as little as £10 a month, although if you have a large mortgage you should expect to pay more.

Not all insurers will cover self-employed workers, so it can be beneficial to get help from an independent financial adviser.

Critical illness cover

While more expensive, critical illness cover pays out a tax-free lump sum if you are diagnosed with or have to undergo treatment for a medical condition.

Usually the size of the lump sum payment will allow you to pay off your mortgage and other debts in full, but if you want it to cover monthly bills or other living costs, the premium will be a bit higher.

Different policies cover different illnesses, and some will specify that you have to have a baseline level of severity to qualify for the payout.

For example, some policies won’t pay out if you are diagnosed with stage one cancer but will pay out for stages three and four cancer diagnoses.

It’s also possible that a medical condition could prevent you from working but your CIC policy won’t pay out if it’s not specifically named on the list of conditions covered.

There are various product features which vary depending on the policy you choose. Some are linked to inflation, currently running at 9 per cent, so if you have to claim in years to come the lump sum will reflect the value of money at that time.

Other policies are tied to your mortgage – the lump sum decreases in line with the value of your outstanding mortgage balance because you’ll need less to pay off the remaining debt. This type of policy tends to be cheaper.

The price you pay for CIC will depend on how much cover you want – the bigger the payout the higher the monthly premium – and how likely you are to claim. For example if you’re a smoker or have a pre-existing medical condition, your insurer is likely to charge you a higher premium.

As a rule of thumb however, taking £100,000 of critical illness cover when you’re 30, a non-smoker and in good health over a 20-year fixed period should set you back around £25 a month.

The older you are the higher the premium, so at 40 you might expect to pay £50 a month while at age 50 the premium would be more around the £100 a month mark.

Income protection

The most comprehensive type of cover is income protection, which pays out a regular income until you retire or are fit to return to work.

Monthly payments typically come in at around two thirds of your salary payments to reflect the fact you’ll be eligible for some state benefits, but usually allow you to cover your mortgage payment and the bills. It is possible to up the amount you want to receive, but again, it will push your premiums up.

Income protection can be much more expensive than the other types of sickness insurance, though not always. Your premium will be calculated based on a combination of factors including your age, health, job, lifestyle and whether you choose to take a policy that covers you being able to do your job specifically or simply a job.

A non-smoking 30-year old office worker wanting to receive £1,500 income a month until retirement, on an own occupation policy with a 13-week wait until the first payment is made, monthly premiums range from £25 to £35 a month.

Employer and state support

Before taking out insurance, do bear in mind that your employer may have some benefits you should factor in when deciding how much and what type of cover to take.

Most employers offer a grace period during which they will pay you full pay while you’re on sick leave – usually around six weeks a year. Some will also offer income protection insurance as part of your benefits package, though this may have a fixed time limit on payouts.

Where employees are off sick for a long period, companies usually move to Statutory Sick Pay, which is £99.35 a week for up to 28 weeks.

You could also qualify for Employment and Support Allowance, which in 2021/22 ranges from £77 a week to a maximum of £117.60 a week.

It’s unlikely this income would cover the cost of your mortgage and household bills however.

Take advice

While you can buy any of these types of insurance directly from insurers, it is usually a better bet to get independent advice from a broker or IFA as they’ll help you to find the most appropriate policy for your circumstances for the best value.

“The fragility of life and the challenging economy witnessed over the past two years mean more people are considering insurance to protect their mortgage payments,” adds Anderson.

“Doing so can ensure that, should the worst happen to the mortgage holder, family members will be able to continue living at the property.”

Struggling to meet monthly mortgage payments?

None of the insurance products above will help if you are struggling to pay your mortgage but you are still working and you can’t take a new policy if you know you’re about to be made redundant.

If you are struggling to meet your mortgage payment because inflation has pushed up your bills, contact your lender and ask for help.

Usually that comes in one of several forms. You can take a mortgage payment holiday, though be aware that long-term this will mean you pay more interest overall.

You can negotiate a lower monthly repayment for a fixed period, often by switching part of your mortgage onto interest-only.

In some cases, you can also apply for support for mortgage interest, though this is unlikely to cover your whole payment.