Insure your futurePosted on: 19 May 2014 by Gareth Hargreaves
Don't be tempted to reduce your outgoings by cutting the safety net beneath you.
Could the mortgage market review (MMR) be creating some of the very problems it is attempting to eradicate?
It is clear that “affordability” and the intrusive questioning into the customer’s financial lifestyle is likely to continue a trend of declining insurance cover.
Monthly insurance premiums, along with pension contributions, can reduce your chances of getting a mortgage by impacting on your “affordability” factor. Those planning and preparing for the future in a sensible, responsible and prudent manner are being penalised under the “affordability” microscope.
Those living for the moment and spending little of their disposable income for that rainy day will find MMR life easier purely because there is less committed expenditure coming out of their bank account via monthly direct debits and standing orders.
Recent research by Scottish Widows shows that spreading the risk through insurance is a declining market.
Insurance market's poor image
The various financial scandals, especially Payment Protection Insurance (PPI), have not helped the image of insurance. Financial institutions have paid out hundred of millions of pounds in fines as it’s been revealed that up to 90% of premiums paid for cover have gone in commission.
Your Independent Financial Adviser (IFA) will tell you that it would be financially foolish to throw the baby out with the bath water by disregarding the value of insurance.
Insurance provides much more than just a comfort blanket; minimising the impact of the unexpected or unusual, as well as making sure that you don’t leave your nearest and dearest in financial mire if something happens to you.
One of the key findings from the Scottish Widows research showed that only 50% of mortgage holders had life insurance – an annual drop of 4%. With increased life expectancy, the cost of life insurance, even for those approaching retirement, and especially for a period of 10-15 years, has dropped considerably.
It remains a puzzle that in the current intense stress-testing of customers, lenders don’t require a life policy for the amount borrowed as a part of the lending criteria. Not only would that secure the loan for the lender in the event of a death, but would remove any property problems for the grieving family at a time of emotional stress.
Why write a Will?
Nobody intends to leave his or her family in strife. However, the combination of having no life cover, and perhaps the absence of a will, can create problems and consequences that take a generation to resolve and recover from. How many are reading this and thinking “how sensible” – and have not written a will!
Often illness or loss of work can cause greater problems. Even attempting to downsize is not that easy.
A portable mortgage is not all its cracked up to be, even if you are midway through a fixed-rate period. You will be told that it’s the product that’s portable; you will be given a new mortgage, provided you satisfy the criteria in place at the time of the original mortgage. If you can’t, and want another mortgage, then you have to pay exit penalties!
That seems unfair and unreasonable – perhaps it is, but that’s the way it works at present. You can prepare and protect yourself and your family from the consequences through insurance, like critical illness cover.
Your IFA does not particularly like painting a black picture of what might happen in your life, but they have a responsibility to point out the potential knock-on impact of illness (long or short term) or the loss of a job or something unexpected cropping up.
The Scottish Widows research also showed that only 17% of mortgage holders had critical illness cover, a drop of 3% from 2013.
Many will have some protection from their employment contract – 64% of mortgage holders believed their employer would pay them a full salary, or a full salary followed by a partial salary, if they are off work for a long period of time.
That may be true, but your IFA will suggest that you find this out before anything happens, rather than afterwards when the opportunity to limit the damage has gone.
These are the questions you should be asking and answering, rather than MMR’s increasing inquisition.
How often do you have steak for dinner?
Is your husband a member of a golf club?
How often do you spend money on a haircut?
Do you plan to continue with £18-a-month milk deliveries when you move?
The Sunday Times has revealed that many mortgage applicants are seeing their loan requests reduced from initial indications under the new MMR lending rules, as lenders take an extremely broad view of what is “essential” spending.
Insurance, in all its forms, has long been “essential” spending for those planning ahead. You won’t get a mortgage without building insurance on the property. That form of insurance was introduced after the Great Fire of London in 1666, when over 13,000 homes were destroyed.
Life Insurance came later – the Amicable Society for a Perpetual Assurance Office was founded in London in 1706, so it is well past its 300th birthday. Despite its age, it still has a key role to play in protecting families from financial hardship. Check with your IFA.
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