Buying a home? Protection insurance explained
Buying a new home is exciting, but it's also one of the biggest financial investments you'll ever make. Here's how to make sure you're protected if something goes wrong.
Odds are that you've taken out a new mortgage, and now's the time to think about how you might protect that and your property if you or your partner lose your income or become unable to work. This is especially important if you're self-employed and not entitled to sick pay or a redundancy package.
Protecting your home
There are a number of insurance policies out there to help you protect your mortgage - which one suits you best will depend on your circumstances.
Income protection insurance is designed to protect your income if you have an accident or become too ill to work. It's particularly important if you're the main breadwinner. This type of policy is designed to pay out a set percentage of your salary on a monthly basis until your retirement date, or until you're able to return to work.
Another option is short-term income protection. This type of insurance can help cover mortgage payments and outgoings if you're made redundant or are too sick to work for a short period of time. It pays out an agreed sum for a set duration, usually about 12 months. These policies often have some exclusions and might not pay out if, for example, you take voluntary redundancy.
Mortgage Payment Protection Insurance is a form of income protection that can cover your mortgage repayments in full, usually for 12 months and after a deferred period. They can be expensive compared with the level of benefit you receive.
Other options include critical illness cover, which provides a one-off payment if you contract a specified illness. This sum could be used to pay off your outstanding mortgage or to cover costs related to your illness such as alterations to your home.
Payment protection insurance (PPI) is designed to cover your loan or credit card repayments for a specified period (usually 12 months) in the event of an accident, sickness or sometimes redundancy. It's been widely mis-sold in the past but can still provide useful protection.
Life insurance pays out a lump sum if you die unexpectedly, which can be used to pay off a mortgage.
A 'decreasing term' life insurance policy is often the cheapest and simplest option. This type of policy will see the amount of money covered decrease in line with your mortgage balance. This is a cheaper option than a 'whole of life' policy where there is no guaranteed payment and the sum insured does not decrease in line with the mortgage balance.
Do you already have cover?
When it comes to personal financial protection, it's always worth checking what protection you might already have. You or your partner may find you're already covered in some way through a workplace benefits scheme. It is not unusual for employers to provide benefits such as life insurance, sick pay, or even some form of income protection. But if you leave your job or lose it, you'll also lose any associated benefits.
You might also get some help from the state, but this might be less than you expect.
Savings as a form of protection
Although many of us put money aside for large purchases, it's also a good idea to save up for the proverbial rainy day. The general rule is to save three months' worth of living expenses, to give you some cover in case something goes wrong. Your living expenses should include all the basics: mortgage payments, debts, household bills, food etc.
Of course, it's not always easy to build up months' worth of savings and you may be unable to return to work for a longer period, or face additional costs in relation to your accident or illness or even funeral costs. Nevertheless, it's useful to think about how you or your family would cope in these circumstances, so you can be prepared in some way if the raincloud does come.
Where can I get an insurance quote?
One way to purchase personal protection is through a financial advisor. They will be able to look at what protection you might already have and consider other priorities, such as the need to save towards retirement, pay off existing debts or build a savings fund.
They will be able to help assess your requirements and how they may change in the short-long term to make sure you only purchase the cover you need, when you need it.
You can find an independent advisor through:
Alternatively you can purchase a protection policy directly through an insurance company - but it's worth doing your research first.
What Mumsnetters say about protection insurance
"My partner got very ill last year and we luckily had income protection; however, a lot of policies, ours included, will only pay the mortgage for 12 months."
"Nobody wants to think about the worst, but even just having a policy that covers your mortgage cost is good, for peace of mind."
"A good advisor will find out about your needs, offer a tailor-made solution that is within your budget, and deal with all the paperwork for you. I always think something is better than nothing when it comes to protection."
This article is provided by the Money Advice Service. All information accurate as of date of publication.
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Disclaimer: Any content in our family money section is intended as general information only. For specific advice about your personal financial situation, get advice from qualified, independent, regulated professionals.
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