Here is another Chapter from my book “The Self-Employed Mortgage Guide” which is all around Insurance, the different types of insurances and why YOU need it!
Chapter 2: Insurance
You may be wondering why I’m devoting a whole chapter to what seems like a side issue. The truth is, everybody needs insurance but very few people want it.
If you’re moving towards making the biggest financial commitment of your personal life, you need to make sure that your family can keep a roof over their heads and that you can still maintain your standard of living if something happens to you. Insurance is really a very important part of the house buying process and the majority of lenders will want the costs of insurance to be factored into your monthly affordability.
If you are the owner of a limited company, there are a few policies that you can pay for through your business. You’ll find these at the end of this book, in the section on the entrepreneurial approach to home owning.
Let’s take a look at the different kinds of insurance. Home insurance
Protecting your home is extremely important. Legally, you have to ensure the building. This is because the mortgage lender owns a large percentage of your house until it’s repaid – of course, they want to know it’s insured. As lenders require you to have this insurance, it’s generally included as a condition of a mortgage offer right from the beginning.
If your home is damaged for any one of a variety of reasons, a buildings insurance policy could give a pay-out to cover all the costs. So, when money’s tight and disaster strikes – let’s say a window gets smashed – you won’t have to worry about how you’re going to pay for the repairs. Not having buildings insurance could put your home at risk, especially if you can’t have the damage repaired immediately.
Contents insurance is easily explained: turn your house upside down and everything that falls out should be covered by contents insurance. The things that don’t fall out – the walls, kitchen units, etc. – are already covered by buildings insurance.
While contents insurance is optional, it’s certainly wise to have a look at this cover if you want to protect the valuables in your new home. Contents insurance can cover many things, from your new TV to the antique china on your mantelpiece. A pay-out from this policy will cover the cost of repairing or replacing the item if it’s damaged or stolen.
When taking out buildings and contents insurance, you need to make sure you have a realistic evaluation of what is to be covered. If you’ve got contents insured for £40,000 and you’re burgled, when the loss assessor visits after the event and sees your contents are actually worth £80,000, you’re under-insured by 50%. When the insurance company comes to pay out, the amount they give you is very likely to be only enough to cover 50% of what you need.
Ensuring the people who pay for the house and its contents every month is arguably even more important than home insurance. It’s vital to protect your children, and your loved ones, who may inherit the property if the worst should ever happen to you.
None of this insurance is compulsory, but I highly recommend you factor these costs into your monthly budget. The problems that could arise from not being insured by far outweigh the cost of insurance.
If you have an accident and you’re self-employed, who’s going to pay for your mortgage? I know everyone says – and I’ve said it myself – ’I’m never ill’ or ‘it won’t happen to me’. But sadly it can often happen when you’d least expect it. Every year almost one million people find themselves unable to work because of a serious illness or injury.7
The government will give you less than £300 a month when you’re out of work from illness or disability.8 Would that cover your mortgage? Most probably not. If you’re unable to work and therefore can’t pay your mortgage, in time you’ll lose your house as well as ruin your credit score for any future loans, credit cards, or even mortgages.
This is the least taken-up policy and yet probably the most important. If you had a money machine that sat in your lounge and on the first of every month it spouted out £2,000, wouldn’t you ensure it against breaking down? I know I would.
So why are you any different? Ensure yourself, especially if you’re the main earner and have a small number of staff, or if you are the key person in a limited company, meaning that if you didn’t make sales or weren’t there the business turnover would suffer.
Income protection can pay you a monthly income of up to 55% of your annual salary, after a deferred period, up until your retirement. You either reach the end of the policy or you die…
The key thing is to understand your income. If it’s going down, you may be paying too much for your policy: the insurer will only pay out based on what your actual earnings are.
Critical illness insurance isn’t only there to repay the whole mortgage debt; depending on the illness you suffer it can buy you valuable choices.
Everyone knows someone or has at the very least heard of someone who’s suffered from cancer. It’s estimated that one in two people will suffer from some form of cancer in their lifetime.9 If there are two of you on your mortgage, I’m sure you can do the maths.
There are currently up to 80 conditions and operations covered by critical illness insurance, depending on which insurer you choose. The main thing is that the ’big four’ conditions should be covered: cancer, heart attack, multiple sclerosis, and strokes.
Case study: a life-changing accident
From 18-stone bodybuilder to life-changing major back surgery, followed by twenty-seven months in a wheelchair – would you believe that my best friend is now mortgage free?
You could say this is a testament to Ed. He’s got a powerful mindset and accepted his situation after his serious fall while on holiday; at no point did he show any negativity. I’ve seen him flat out in a hospital bed, then slowly extending his leg out of the wheelchair, then returning home in December 2015 and starting back at the gym again. Words can’t describe how much respect and admiration I’ve got for his strength of character.
Ed will walk again (although he will say ‘might’ and won’t stop trying) and after such a traumatic event, he doesn’t have the worry of paying his monthly mortgage. We made almost forty calls, over four months, to the hospital and to the insurer to make sure he’d receive his payout. And in February 2016, he finally got it.
‘If I hadn’t had life insurance, things would have been very different. I would have had to sell my house, and I would have had to return to work sooner because the money would have been more of a priority than my health and rehabilitation.
‘Before my accident, I considered cancelling my life insurance policy, because I thought I would never use it – I’m young, what do I need that for?
‘Keeping my policy allowed me to keep my house, rehabilitate myself back into work and a social life in my own time, maintaining my independence. I would recommend life and critical illness insurance to everyone. The price to pay for not having it for you and your family doesn’t bear thinking about.’
Children’s critical illness
One free benefit offered by insurers is health coverage for your child, usually up to the age of eighteen, or until they leave full-time education, depending on the insurer. Children receive almost the same illness cover as adults allowing for variations between insurers. The sum assured is usual 25% of the cover amount or £25,000, whichever is the lower, again depending on the insurer.
This is a great benefit to have, even though I am confident no parent would ever wish to have to draw on it. It offers the assurance that your child would be getting the very best medical care anywhere in the world. Life insurance
Life insurance is usually the cheapest form of insurance. If one of you died, could the other still afford the mortgage payments on their sole income? Could your family still maintain the lifestyle you want them to have?
I feel life insurance should be compulsory for every homeowner with a mortgage in the UK, as there’s just too much risk in not having it. If your partner doesn’t earn as much as you or is a househusband/wife, then insurance is vitally important.
There are two main options:
- A level term policy that pays out the same amount at any point during the term, i.e. £100,000 would be paid out in Year 1 or Year 20 of a 25-year policy. The advantage is that if your mortgage is £50,000, whenever you claim, you’ll have £50,000 to do with as you please.
- A decreasing term policy, which entails cheaper monthly contributions, means the £100,000 reduces over the course of the 25-year mortgage, only leaving enough to repay the mortgage at any given time.
If you’re purchasing life insurance as a sole individual and have no dependents, your home will become part of your estate on your death and left to your next of kin, i.e. your parents. They’d be expected to pay the mortgage until the house is sold.
Want to read more? Buy “The Self-Employed Mortgage Guide HERE – http://amzn.to/2Cw1yOz