In the UK the topic of loan protection insurance has seen a lot of discussion in the media, particularly associated with the Payment Protection Insurance (PPI) mis-selling scandal. Although it has been identified that banks and other financial institutions were more interested in selling PPI policies than in the actual needs of their customers, it does not alter the fact that policies such as life, critical illness, income protection and mortgage protection insurance should form a vital part of most people’s financial planning.
When you buy a home with a mortgage it will typically take 25 years before you become the full owner of the property. Although lenders are often reasonable to those who are in temporary financial difficulties, it is a fact that if a life changing event means that you are unable to make the required regular repayments for a considerable length of time, the lender will feel that they have no alternative but to take possession of the property, leaving you and your family homeless.
Every year many thousands of young people make the decision to buy their first house, often at the same time as they start to raise a family. Buying the first home is one of biggest and most important financial commitments made by most people during their entire lifetime.
When a young couple buy a home together, and start to raise a family, they are unlikely to be focused on thoughts of premature death or serious illness. Nevertheless it is important to think about how to protect the family’s home and their lifestyle if something were to happen to one or both parents.
Protection through insurance policies is the best way to ensure that your family home and lifestyle can survive the major financial shock of a death or serious illness in the family. Some policies are intended to clear major debts (usually the mortgage) if something happens to the main breadwinner, while other policies can protect income.
Life and critical illness policies are normally designed to provide a lump sum benefit. Often the level of cover is set to be just enough to fully clear the mortgage, but it is quite possible to insure for a higher benefit, leaving a substantial cash sum in hand after the mortgage is paid off.
Income/mortgage protection insurance (IPI and MPI) are different in that they provide a monthly benefit rather than a lump sum. MPI provides enough to cover the mortgage payments, while IPI is intended to replace the household income which is lost if the insured party is injured, sick or unemployed. There may be a period of a few months before payments will start on these policies, and accepting a longer period will lead to reduced premiums.
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