Critical illness and mortgage life insurance

[MatildaV]

I currently pay £42 per month for critical illness insurance and a decreasing mortgage life insurance. I was sold this when I took my mortgage out 7 years ago and didn't really have a clue what I was doing (no excuse, I know). I'm not sure if I need it but would be interested to hear what other people have in place.

I work for a local authority and would get a death grant of 3 times my salary if I die in service. I also have the option of buying a further life insurance policy of 2 times of my salary for less than £4 per month. These 2 benefits put together would more than cover my mortgage. If I was off work sick, then I would get 6 months on full pay, followed by 6 months half pay. If I was too ill to return to work (any work), then I would get early retirement on health grounds.

It seems to me that I'm paying over the odds for the insurance when I'm already quite well protected, and I know that critical illness cover can be very difficult to get paid out anyway.

So, I'm considering cancelling the current insurance and taking up the offer through work for additional life cover. Am I missing anything?

The only point I would make is whether you envisage working for a local authority for the foreseeable future (or as long as your mortgage will last). If you do, then I agree, the sickness benefits are excellent and you probably don't need critical illness cover.

However, most employers are nowhere near as generous as that and if you stop the critical illness now, and want to start it up again if and when you did move jobs, it would be more expensive in all probability.

Obviously you seem well protected on the life cover.

I'd just think about it very carefully. You don't say what age you are but we have been in the position where I was on maternity leave (statutory) and my husband was diagnosed with a critical illness and had to have 3 months off work (with his company paying statutory sick pay for 4 weeks - I think it was £65 a week).

How old are you? How long is the mortgage term? Do you have any dependents? What income would you get from an early retirement package?

If you don't have dependents then you don't really need the life cover as the house will just be sold if you die and proceeds will repay the mortgage lender. If you do have dependents then you need life cover to a) repay the outstanding mortgage balance if you die, and b) provide a means of replacing the lost income stream

Your comprehensive sick benefits sound as though you wouldn't need any income protection cover, as long as the early retirement package would give you enough income to cover the mortgage repayments if the mortgage term is quite long.

I am a great believer in Critical Illness as it happened to my DH, and being able to claim on it and repay the mortgage made a massive difference to his overall well-being. But, having said that, if your sick benefits/early retirement would adequately cover the mortgage payments and other living costs then no, you don't need to have it.

Thanks for your replies. I'm 34 and am a lone parent to 2 children. I plan to move house next year and would get a 25yr mortgage term. The mortgage would be higher than it is now, but would still be covered by the death grant and life insurance that I can get through work. I've just been researching it this morning and I can also get the same amount again through another insurance company for £10 per month. This would be level term life insurance for the next 25 years. If I got decreasing cover (i.e. if it was specifically to cover the mortgage) then it would be less.

All in all, I'd have £300k cover for approx £14 per month - half of that coming from work and half from a separate policy. The maximum mortgage I would take on when moving next year would be about £130k. As the years go on, the extra life insurance through work would increase, but I could choose to opt out of this and would still have the death grant and the other life insurance policy. The mortgage would obviously be being paid down, and less would be required for the children's living expenses. They would also get a dependant's pension of around £8k p.a. each if I die while in the pension scheme, it would be less if I'd left that employer when I died but they'd still get something, and a proportion of the death grant too.

I obviously still want and need the life insurance, I just think I'm paying over the odds for it at the moment. The critical illness cover is what I'm not really sure about. The early retirement package for ill health (which has the same kind of standard of "critical" as most critical illness insurance) would provide a full pension - they calculate it as if you had worked your current hours/salary to retirement age, so it would cover mortgage payments and other living expenses.

Sounds like you have a fantastic employment benefits package. If you will have enough income to cover the mortgage payments long term on either half-pay or early pension then you could drop the Critical Illness as a lump sum from that sounds surplus to requirements.

Level term plan is good as you have children to consider and you've thought it all through and done your sums.

Final thought - have you made a Will to specify who should be guardian to your children if you died while they were minors?

Yes, I've recently done a will and named guardians. They're aware of the finances and also what state help they would be entitled to on top of the pension the children would have and the lump sums.

My only issue with cancelling the critical illness policy is, like mandy said, I may not work where I am for the rest of my working life (although a lot of people do stay public sector, but just work in different roles). I suppose I'd have to cross that bridge if and when I came to it and make some alternative provisions then.

Just a thought: how do you know for certain that you would get early retirement on a full pension if you were too ill to work?

You might think you will, but my experience with my late DH and his employer suggests that employers will do anything legal they can to avoid paying an early pension or running the risk of having to pay out 3x salary to an employee who dies in service.

DH had worked for this well known company for 30 years and yet when we needed their support, their response was to declare his job no longer existed and that therefore DH was a candidate for redundancy. While redundancy may sound good, it was nowhere near the 3x salary they might have to pay out should he die in service. Also had he got the redundancy (aged 47), the chances of him getting a new job were slim. What employer wants to employ someone who has to declare a critical illness on their CV? It might have been nice for the company to pay out his pension on ill-health grounds but since he was responding well to the chemo treatment for Leukaemia, they insisted that his chances of a cure were high and that he would, therefore, not be too ill to work and that retiring on ill-health grounds were therefore not applicable. Incidentally, a critical illness such as cancer can last a lot longer than a year, so bear in mind how you would cope financially after full pay/half pay stops.

It does sound like you have got a lot of cover but I just wanted to say that you can never predict what happens in the future or when. We thought we had everything covered but the reaction of my late DH's employer was shocking.

Interesting.

We took it out on our first mortgage, DH got testicular cancer about 2 years later...and our mortgage was paid off. This has made a massive difference to our finances over the past 10 years.

When I was sold my CI policy it was sold to pay off the mortgage entirely. As we were childless it didn't cover DCs.

We are changing it this year to a smaller policy that covers our children too. Is that an option for you? We are opting for a £60k pay out for CI rather than the full value of our mortgage.