One of the key things we need to do when we take on a big financial commitment like a mortgage is make plans for a time when you or your family might not be able to meet the repayments.
Usually, that means taking out one or more of three different insurance policies – life insurance, critical illness cover and income replacement insurance – all of which will ensure your financial obligations will still be met in the event of death or illness.
There are other policies you can, and perhaps should consider, too – things like mortgage protection insurance and unemployment insurance will mean you’re looked after financially should you lose your job, for example.
Whenever you take out an insurance policy, it’s a good idea to get professional advice to ensure your needs are covered since the level of protection offered by each policy is likely to be different and it’s easy to fall into the trap of buying a policy that might not do what you need it to do if it comes to the crunch.
Here I’m going to focus on life insurance since that is often viewed as the key piece of insurance protection you’ll need to repay your mortgage and ensure the people closest to you are well looked after if you die.
However, when you sit down to consider what type of life insurance you might need, you should focus on avoiding these common mistakes.
Buying the wrong type of policy
One of my recent blogs explains in detail the different types of insurance that are on offer and you can read that here to gain a broad understanding of what is available.
Typically you’ll be choosing from Whole Life, Level Term, Decreasing Term, Increasing Term and Joint Life cover.
As the names suggest, whole life cover means you’re insured until your dying day, regardless of your age or length of time the policy is in force.
Term policies are taken out for a fixed period (usually the life of the mortgage debt) and will either pay will pay out the same sum whenever you die within that period (level term), an amount that decreases in line with your mortgage debt (decreasing term) or an amount that increases steadily over the life of the policy (increasing term).
A joint life policy will insure two lives – typically yours and your spouse’s or partner’s – but will only pay out for the first death.
There is much to consider here – not least the relative premiums for each insurance type – and a professional adviser can help you to make sense of it all. But the key thing to begin with is to avoid the next mistake:
Failing to plan for the future or a change in circumstances
Before buying any insurance policy, you need to ensure you’ve considered not just your needs today, but also your potential needs in the years to come.
It may be you’re a couple just starting out on your life journey together with no dependents. Your needs in the immediate future may be quite simple, relatively-speaking and it could be tempting to take out a policy that ensures those simple needs are met.
But if starting a family is part of the plan, then you’ll need to consider the rising costs that entails. Remember that generally speaking, new life insurance policies tend to become more expensive as we get older – and your adviser should be able to talk to you about the cost benefits and/or savings of taking out a larger policy now or revising a lower level of cover at a later stage.
Not insuring for the right amount
You’d be surprised how many people, having not planned properly, then discover they haven’t taken enough cover to meet their ongoing liabilities and requirements.
Your decision shouldn’t be limited to covering your bills. You need also to consider the kind of lifestyle you want those you leave behind to be able to enjoy. There may have additional costs to meet in later life that you don’t have to worry about right now – school fees, for example.
And don’t forget, there are additional costs that need to be met when somebody dies, so make sure you factor these into your thinking.
It’s usually better to over-insure than to under-insure – but again, a professional adviser will be able to talk through the pros and cons of the options you have.
Buying insurance that doesn’t cover you for long enough
Like making a mistake on how much to insure for, not insuring for long enough can also be financially catastrophic.
Although many people choose to only cover the life of their mortgage debt, it’s worth considering whether you ought to insure for longer. And bear in mind that the term of life insurance is often the thing that can be forgotten when it comes to extending a mortgage.
Failing to pay your premiums
This may seem obvious, but if you don’t maintain your premiums, your insurance may be cancelled – meaning the people you leave behind won’t receive a penny when you die.
Although these are the biggest mistakes people can make when it comes to buying life insurance, there are others that need to be avoided – and these will be covered in January, so watch this space.
If you’re in doubt about the best way to approach your life insurance needs, why not get in touch and speak with a member of our friendly team. We’ll be happy to give you a professional steer on your next steps and we’d be delighted to help you to make the decision that’s right for you not just now but in years to come, too.
Oportfolio Limited is an appointed representative of Primis Mortgage Network, a trading name of First Complete Limited which is authorised and regulated by the Financial Conduct Authority
Your property may be repossessed if you do not keep up repayments on your mortgage.
Oportfolio Ltd fees are payable on application. We charge a broker fee for property purchases of £495 and a remortgage/further advance fee of £395. Our product transfer fee is £295.