But maintaining a commitment to a mortgage is sometimes not as easy as we would like it to be. Life happens and things change, and when those changes put us at risk of losing our home the results can be devastating. At the end of 2014, more than 150,000 UK homeowners were three months or more behind in their mortgage payments. More than 50,000 of these were issued with a ‘possession claim’ over the course of the year, which is when they’re told that the bank is repossessing their house.
Most of these people were, no doubt, hardworking, law abiding individuals like the rest of us, but simply suffered a bad turn of events. Sickness, redundancy and life changing accidents can all strike when we least expect, leaving us in a financially sticky situation. When it comes to something as important as keeping a roof over our heads, it makes sense to put a safety net in place to avoid the worst happening. That safety net is called income protection.
What Is Income Protection?
Income protection is an insurance policy that can give you and your family a financial cushion in the event of something unexpected happening. Most income protection policies will cover you against sickness that prevents you from working, against accidents that cause you to stop working, and some allow you to include an unemployment or redundancy element as well.
The policy is set to pay out a large proportion of your salary every month until you are able to return to work. If you never return to work, it will continue paying out until retirement or death. Depending on individual circumstances, payments will usually be enough to cover both your mortgage and some of your other regular outgoings, making this an excellent match for the discerning mortgage holder.
Isn’t Income Protection The Same As Mortgage Protection?
In short, no it isn’t. Mortgage protection is usually a short-term plan, designed to protect your mortgage payments for 12 – 24 months. It is a policy which will kick in if you are involved in an accident, fall sick or become unemployed. Payouts are usually in the region of £2,000 a month, or around 65% of your monthly income (whichever is lower).
Income protection, on the other hand, is a long-term cover which can protect you against the risk of lost income if you are sick or have an accident, or if you become unemployed. Most policies will pay out in the region of 65% of your gross income tax free, right up until the age of retirement if necessary (or age 70). Plans can also be limited to payout for shorter periods of time – 1, 2 or 5 years – reducing premiums significantly.
Is Income Protection Better?
Income protection is more expensive than mortgage protection insurance, but that extra investment opens up a whole lot of valuable additional benefits for the policyholder. These include:
- Long term pay-outs, up to retirement age if necessary,
- Payments of circa 65% of gross salary, which often increases over time, compared to 125 per cent of mortgage payments, which decline over time,
- Fixed monthly premiums for easy budgeting,
- ‘Own occupation’ rather than ‘suited occupation’ definition of incapacity,
- Fully medically underwritten at the time of taking out the policy, whereas mortgage protection insurance will perform a medical at the time of your claim, which could result in a refusal to pay out.
Most mortgage holders are better off in the long run if they were to choose income protection over mortgage payment protection. The only times it really makes sense to opt for mortgage payment insurance is if you either can’t afford the premiums, or can’t get a policy because of existing health issues. Income protection is also there to provide cover even if you don’t have a mortgage, ensuring that the impact on your lifestyle, and that of your family, isn’t adversely affected financially if you can’t work for a period of time.
If you would like to discuss what insurance and protection policies are best for your individual circumstances, please get in touch. Or if you have a question about any of the above, leave a comment in the box below.