arrowright roundtick plus plus house 66 . 7 % cornercurve

Make sure you have the right insurance for an interest only mortgage

Insurance for Interest Only Mortgage

Everything you need to know about interest only insurance policies

Get Started
continue to article

By Pete Mugleston   Mortgage Advisor

Last updated: 17th December 2018

What type of insurance is appropriate for an interest only mortgage?

We get a lot of enquiries from people wanting to protect their family and investment from unforeseen problems that could jeopardise their future.

Insurance protection arranged for an interest only mortgage covers a range of options and can provide a financial cushion and protection for yourself and your family in the event of accidents, critical illness, death and redundancy.

The expert brokers who work with us can give you detailed advice on which insurance product is most appropriate for your interest only life insurance needs, including:

In general, if you’re looking for insurance against a shortfall in your interest only repayment vehicle if your investment not performing, then as far as we are aware there is no specific insurance for this – other than just making additional over-payments or savings yourself.

Can I get life insurance to cover an interest only mortgage?

Life insurance can be taken out to provide financial cover for an interest only mortgage and is usually written on a level term basis because the level of debt remains the same over the full term of the mortgage.

For example, if £250,000 of cover is taken out at the start of an interest only mortgage, the life insurance element will still have £250,000 worth of benefit right up until the end of the policy. This is in contrast to repayment mortgages, which are usually recommended to have decreasing insurance to match the mortgage balance over the term.

This means that a lump sum equivalent to the amount of your mortgage will be covered by a life insurance interest only option and will be paid out to your family and dependents if you pass away before the end of the policy term.

It is not usually recommended to take out decreasing term insurance for an interest only mortgage because the level of cover reduces throughout the term, when the loan stays the same – this would leave the borrower increasingly under-insured as the term goes on.

Can I get a critical illness insurance mortgage protection policy?

Critical illness insurance cover gives peace of mind to dependents who might otherwise be forced to survive on state benefits if the main breadwinner falls seriously ill and is unable to work and pay the mortgage and household bills.

Critical illness cover is designed to pay out a lump sum if you are diagnosed with a life-threatening illness, such as Alzheimer’s, heart disease or cancer. This can be used to pay off an interest only mortgage, but cover will not be accepted for pre-existing diseases. You must usually also live for 14 days after a medical diagnosis of your condition has been made for a claim to be approved.

Is there a Children’s Critical Illness policy available?

Yes. If your child suffers a critical illness, taking care of them could seriously affect your ability to maintain your income and mortgage payments.

Critical illness for children, be they natural, adopted or stepchildren aged between 30 days and 18 years, or 21 if in full time education, can be added to a critical illness policy and will not reduce the level of cover of the main policy if a claim is made. Child cover benefits tend to be a reduced % of the total insurance benefit, for example to a maximum of £20,000 (some providers pay more than this). Like adults, children will not usually be covered for pre-existing medical conditions.

What happens if I suffer total & permanent disability?

Total & Permanent Disability (TPD) is a specific benefit that can be added to a critical illness policy and provides extra cover if you are totally and permanently incapacitated.

Permanent is normally defined as: “Being expected to last throughout the insured person’s life, irrespective of when the cover ends, or the insured person retires”.

The meaning of disability will depend on the “loss of the physical or mental ability to do the material and substantial duties of their occupation” and the capacity to undertake general work tasks, including walking 200 metres and lifting a 2kg weight at table height for up to 60 seconds.

Life Insurance & Critical Illness - Stand Alone or Combined?

Life insurance and critical illness policies can be stand alone plans or combined, but which one is right for you? Expert protection brokers we work with will help you decide.

Critical illness policies usually come with life cover as standard these days. Additional stand-alone policies cost more but offer comprehensive coverage. For example, A couple might set up two separate plans, one for £100,000 of life insurance and another for £50,000 of critical illness cover. The two policies would stand alone and a claim for one, for instance, life insurance, would not impact the amount that could be claimed for critical illness.

On the other hand, a combined policy would have cheaper premiums but the amount paid out would be less. If a combined life insurance (£100,000) and critical illness (£50,000) plan paid out £50,000 - for a critical illness claim, then only £50,000 would be further paid out in the event of a life insurance claim.

Should I get income protection insurance with an interest only mortgage?

Income protection insurance will pay a regular tax-free income if you are unable to work as a result of illness or injury – generally they are set around your ability to perform your own occupation, or any occupation – if your GP signs you off then it may qualify as a valid claim.

Whether you are offered terms on “own occupation” or “any” depends on what you do. Generally, labour intensive roles would be more likely to class as “any” – this means if for example, you break a leg and are unable to ever work as a brick layer again, yes you are signed off from that job, but you could work in an office once recovered. These policies would therefore only pay out if you couldn’t do any role.

Other policies are set to “own occupation” and if you are signed off to not work in that role, it will pay out.

For many policies, there is no limit to how long you can make a claim for, but the level of benefit is usually set at a maximum of between 50-65% of earnings. Some pay out for a maximum of 12 months of continuous illness, some 24 months, and others can pay out indefinitely up until retirement (or the end of the policy).

Income protection policies are available to both the employed and self-employed and cover a wide range of illnesses which will provide an income until you go back to work, retire or die.

Income Protection – should I get level or index cover?

Level cover means the level of income paid out at the beginning of the plan will stay the same throughout the life of the policy and will not increase. Salary increases can be reflected in an increase in premiums and benefits but the level is unlikely to keep pace with inflation.

On the other hand, an index cover income protection plan has a built-in rise in premiums and cover, often adjusted every 12 months. Plan holders are able to choose the level of increase they want to pay and benefit from and they range from 3% / 5% to a maximum Retail Price Index level of 10%-12%.

Income Protection – Guaranteed Insurability Options

Home buyers who move to a bigger house or increase the level of their mortgage can increase their amount of income protection cover by up to 50 per cent of the original amount if they have added Guaranteed Insurability Option to their policy. Any increase though is limited to a maximum of how much their mortgage payments have gone up by.

This can be useful for those who have had medical conditions since they originally took out their policy and would no longer qualify for protection on the same terms (either declined or subject to increased premiums).

What is Mortgage Payment Protection Insurance?

A mortgage payment protection (MPPI) plan will cover mortgage payments for up to 24 months if you are unable to work due to accident, sickness or unemployment.

It is worth pointing out however that unemployment claims are linked to involuntary redundancy and will not cover you if you are dismissed, have only been working a short while or choose to accept a redundancy package voluntarily.

Those who are self-employed could still claim, so long as their business has been officially dissolved and ceases trading.

Key features of MPPI for interest only mortgages

  • Cover is available usually to those aged between 18 and 65
  • You will not have to fill out a detailed medical questionnaire but if you may be asked some generic health questions
  • Deferred payment period is usually set to 30 days
  • Maximum payment period of 24 months
  • The amount received is usually equal to the monthly mortgage payment and the associated insurance premium
  • Any payments received are tax free

Speak to a mortgage protection expert today

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 17th December 2018
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information.

The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA.

Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

 

Find out more about Interest Only Mortgages

Interest Only Mortgages