Do I Need Life Insurance? Understanding Protection Policies

a umbrella protecting a paper cut out family and model home
Published on 18 October 2023

Your home is more than just four walls and a roof; it’s your sanctuary, your family’s haven, and a significant investment. It is probably the biggest purchase that you will make during your lifetime. So obviously, you want to protect it – like you do your car or your phone, and at the same time secure your family’s financial future. This is where protection policies come into play. With so many products and so many insurance providers, it can be difficult to know where to start. So, we’re here to help you understand their importance and answer your questions on if you need life insurance to apply for a mortgage? To help you make informed decisions.

Why Protection Policies Matter

Life is unpredictable, and unforeseen circumstances can have a huge impact on your and your dependent’s finances. Protection policies are financial safety nets that are designed to shield you and your loved ones from the unexpected. Here are some key protection policies to consider:

  • Life Insurance: Life insurance provides financial security to your family in the event of your death. It ensures that your loved ones can cover living expenses, mortgage payments, and other financial commitments.
  • Critical Illness Cover: This policy pays out a lump sum if you’re diagnosed with a critical illness, such as cancer or heart disease. It helps cover medical bills and other expenses during a challenging time.
  • Income Protection: If you’re unable to work due to illness or injury, income protection insurance replaces a portion of your income, ensuring you can meet your financial obligations.
  • Home Insurance: Protect your property against damage, theft, or natural disasters with comprehensive home insurance. It safeguards both your dwelling and its contents.

Here we will take a look in more detail at the different policies related to you (so not home insurance!) and why you should consider them when applying for a mortgage.

Life insurance

Life insurance or life assurance as it is sometimes referred to, is a policy designed to provide a lump sum payment to your beneficiaries upon your death. This money, known as the death benefit, can help support your loved ones financially when you’re no longer around.

Types of Life Insurance

Term Life Insurance: This is the simplest form of life insurance. It provides coverage for a specified term, typically the term of the mortgage. If you die during the policy term, your beneficiaries receive a tax-free lump sum payout.

Whole-of-Life Insurance: As the name suggests, this policy covers you for your entire life. It pays out a lump sum regardless of when you pass away, making it ideal for leaving an inheritance or covering funeral expenses.

Endowment Policies: These combine life insurance with an investment component. You pay regular premiums, and at the end of the policy term, you receive a lump sum or annuity. If you die during the term, your beneficiaries receive the death benefit.

How much will Life Insurance cost?

You’ll pay regular (usually monthly) premiums for your policy. The cost depends on factors like your age, health, coverage amount, and term.

  • Coverage Amount: The payout amount (death benefit) is chosen by you when you take out the policy. This can be a fixed amount (the mortgage value), increasing (usually linked to inflation) or decreasing (in line with the repayment of the mortgage debt).
  • Beneficiaries: You can nominate one or more beneficiaries who will receive the death benefit. It’s usually tax-free, but you should consider the inheritance tax implications.
  • Medical Exams: Depending on the policy, you may need to undergo a medical examination. Some policies, like guaranteed acceptance life insurance, don’t require a medical exam but tend to have higher premiums.
  • Premium Type: Premiums can be level (fixed) or reviewable. Level premiums stay the same for the policy’s duration. Reviewable premiums can increase over time, especially with term policies.

Do I need Life Insurance when I take out a mortgage?

Life insurance ensures your loved ones are financially secure if you’re not there to provide for them. Many people take out life insurance to cover their share of the mortgage debt in case of their death. This ensures their family can remain in their home. But it’s not a requirement when you take out a mortgage. But you may want to consider how your dependents would be able to afford to pay for the property if you’re no longer here. It’s important to regularly review your life insurance needs. Major life events, like having children, increasing your mortgage debt, or extending the term of the mortgage, may mean you need to make adjustments to your coverage.

Critical Illness Cover (CIC)

Critical Illness Cover (CIC) is a type of insurance policy designed to provide financial protection if you’re diagnosed with a critical illness during the policy term. This coverage pays out a tax-free lump sum upon diagnosis, which can be used to cover medical expenses, lifestyle changes, or any other financial burdens that may arise.

Types of Critical Illness Cover

Covered Critical Illnesses: CIC policies typically cover a specific list of critical illnesses. These often include conditions like cancer, heart attacks, strokes, multiple sclerosis, and organ transplants. The exact list varies between insurance providers. If you’re diagnosed with a covered critical illness, the policy pays out a lump sum to you. This amount is set when you take out the policy and is usually tax-free. CIC policies often have certain exclusions, such as pre-existing conditions, self-inflicted injuries, and some early-stage cancers. To make a successful claim, you usually need to survive for a minimum period following the diagnosis, typically 14 or 28 days.

How much will it cost?

Like life insurance, CIC premiums are based on various factors, including your age, health, the coverage amount, and any additional features. You pay regular (usually monthly) premiums for the policy.

  • Coverage Amount: You can choose between level premiums (which remain fixed) or reviewable premiums (which can increase over time). This is usually linked to inflation and the amount covered will increase with inflation.
  • Financial Protection: CIC provides a financial cushion when you’re diagnosed with a critical illness, helping you cover medical costs, lifestyle changes, or even debts.
  • Maintaining Your Lifestyle: The payout can help maintain your and your family’s lifestyle if you’re unable to work due to your illness.
  • Peace of Mind: Knowing that you have financial protection for critical illnesses can offer peace of mind.
  • Covered Illnesses: Review the list of covered illnesses in the policy. Some policies might cover more conditions than others.
  • Additional Features: Some policies come with optional extras, like child cover, that you might want to consider.

Do I need Critical Illness Cover when I take out a mortgage?

It’s crucial to understand that Critical Illness Cover is not the same as health insurance or income protection. It’s specifically designed to provide a payout in the event of a critical illness diagnosis. It’s not a requirement but you should consider how you would be able to cope financially if you were diagnosed with a critical illness.

Income Protection

Income Protection is a type of insurance designed to provide financial support if you’re unable to work due to an illness or injury. Unlike Critical Illness Cover, which pays a lump sum upon diagnosis, Income Protection provides a regular income, usually a percentage of your salary, when you’re unable to work.

Types of Income Protection

If you’re unable to work due to illness or injury, Income Protection pays you a regular, tax-free monthly income. This income can continue until you recover, retire, or until the end of the policy term. You can choose a waiting period when you take out the policy. This is the period you need to be unable to work before the policy starts paying out. Waiting periods can vary from a few weeks to several months. You also choose a benefit period, which is how long the policy pays out. Benefit periods can be short-term (covering you for a few years) or long-term (covering until retirement). Policies may exclude pre-existing conditions or have specific criteria for certain illnesses or injuries.

How much will it cost?

Like life insurance and CIC, the cost of premiums depends on various factors such as your age, health, and occupation. You pay regular (usually monthly) premiums for the policy.

  • Coverage Amount: You can choose the amount that you would like to receive as a monthly payout. This may be to cover a percentage of your salary or just your mortgage payment.
  • Waiting Period: Consider the waiting period carefully. A longer waiting period can reduce premiums, but it also means a longer time without income.
  • Policy Type: Choose between short-term and long-term policies based on your needs. Short-term policies are generally more affordable but provide a limited duration of coverage.
  • Policy Exclusions: Understand any exclusions, especially those related to pre-existing conditions.
  • Occupation: Some policies are tailored to specific occupations or industries, so look for one that suits your job.

Do I need Income Protection when I take out a mortgage?

It’s not a requirement to have Income Protection when you take out a mortgage, but it ensures that you have a source of income to cover your living expenses, even if you can’t work due to an illness or injury. It provides peace of mind, knowing that your financial obligations are covered during difficult times. As the policies are customisable, they allow you to tailor the coverage to your specific needs and budget.

The 177 Mortgages Advantage

So, why choose 177 Protect for your protection policies? Here’s what sets us apart:

  • Expert Guidance: Our experienced advisors will assess your unique financial situation and help you choose the right protection policies tailored to your needs.
  • Wide Range of Options: We have access to a diverse range of protection policies from leading providers, ensuring you find the coverage that suits your requirements. With discounts available for taking more than one policy with the same provider.
  • Unbiased Advice: At 177 Protect, we don’t charge fees for our services. Our goal is to provide you with impartial advice that prioritizes your financial well-being.
  • Ongoing Support: We’re not just here to set you up with a policy and then disappear. We provide continuous support, ensuring your protection coverage aligns with your evolving needs.

At 177 Mortgages and 177 Protect, we understand that your home is one of your most significant investments. Protecting it and your family’s future is paramount. That’s why we offer comprehensive protection policies that give you peace of mind. Our team is dedicated to making the complex world of insurance simple and accessible. We’ll guide you through the intricacies of protection policies, helping you make informed choices that safeguard your financial well-being. Don’t leave your financial future to chance. Contact 177 Protect today, and let’s build a robust protection plan together to meet your needs and budget.

177 Mortgages and 177 Protect are open 7 days a week. We’re always happy to talk through your mortgage, specialist finance and protection needs in more detail. If you’d like to book an appointment or simply find out more information, please get in touch.

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