14th October 2019 - Jacques Howell

The Importance of Income Protection

When you hear the words ‘mortgage protection’ what do you instinctively think of?

You’re probably thinking about life cover or critical illness cover? These are all great ideas and excellent advice for people taking out mortgages as they can provide a lump sum to repay the debt in full if one of the mortgage holders dies or suffers a critical illness during its term. 

But what about the potentially greater risk that mortgage holders face – the risk of going off work sick and not being able to meet their monthly mortgage payments?

There’s a general insurance solution called mortgage payment protection insurance but it only pays out for a short period. What about a pure protection version – something that can pay a benefit for a lot longer?

Well, we already have one – it’s called income protection. We don’t tend to associate it as part of the mortgage protection solution, but should we?

What are your mortgage clients’ risks?

Mortgage key facts illustrations, which lay out all the features and the terms of the mortgage product, always have a warning that along the lines of “YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE”

But what exactly are the risks this warning is talking about?

Let’s look at an example. Bob is 30 years old, the average age of a first-time buyer in England and Wales, a non-smoker and has taken out a mortgage for 30 years. What are the chances of something happening that could stop him from being able to keep up his mortgage repayments?

According to Royal London’s risk summary report, Bob has a 2% chance of death, a 6% chance of suffering from a critical illness, and a 19% chance of being unable to work for a period of two months or more during the term of his mortgage. 

But most mortgages are taken out on a joint basis so this would make the chance of something happening to one of the mortgage holders even greater.

The strange paradox is that far more life cover and critical illness cover is taken out each year by mortgage applicants than income protection.

The way forward for mortgage protection?

There are lots of people out there with excellent life and critical Illness plans that cover their mortgages and were recommended to them by their financial adviser. 

My worry is what are they going to do if they go off work sick at some point during their working life and can’t afford to pay their mortgage each month? 

They can’t claim on one of their ‘mortgage protection’ plans because they haven’t died or been diagnosed with a critical illness. 

Losing income through sickness and the subsequent inability to keep up those monthly mortgage payments is precisely what that risk warning on the key fact’s illustration was talking about.

The industry is making great strides to promote the idea of income protection and this is reflected in the amount of cover taken out in 2018.

If you would like to discuss the issues covered in this article further, please do not hesitate to contact your Financial Planner, or the team, on 01273 407500.

Sources

https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/firsttimebuyerhousingaffordabilityinenglandandwales/2017

https://studio.royallondon.com/webapp/rl/reports/

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