It can be a tough job convincing clients of the importance of protection alongside their mortgage. Many think they do not need it as they are covered through work, are fit and healthy, or the policy they took out years ago will still be enough, despite changing circumstances.
The conversation can be hard enough when talking about the family home, but it can be even more of an uphill struggle when it comes to discussing it with a client arranging a buy-to-let mortgage.
The common objection with a rental property is that it can just be sold in the event of death, or the rental income would continue if the owner became critically ill. This is true, at least to some extent, but it does not mean a conversation about protection is unnecessary.
Ensuring the family home is protected is generally the priority but if it is affordable to protect investment properties as well, there are good reasons to consider it.
A good place to start is to understand the reason behind the purchase of the rental property.
Is the investment being made with a mind to capital growth so as to leave an asset for the family? An asset that could then be used as an income for life or could later be sold to receive a lump sum?
These plans are likely to be affected if the owner was to pass away without clearing the mortgage, particularly if the property had not been owned for long and seen only a limited or no increase in value.
Having life insurance in place would reduce the chance of these long-term goals being affected and enable the family to inherit the property as a debt-free asset.
If the property is being bought with a view to provide an extra income during retirement, life insurance could prevent the surviving partner being forced to sell. That could protect and improve their future financial position and allow them to achieve their original retirement goal. Property is an illiquid asset, so it is not always easy to just sell. In addition, there will be costs associated with a sale, which may be more than the premiums for life cover, and the property might need to be sold under the market value to secure a quick sale. When you also factor in notice periods for tenants, you could leave a debt and administrative mess to sort out, rather than an unencumbered asset – the last thing needed at an emotionally stressful time.
There is also the question of who manages the property – even more relevant if there is a portfolio. This can take time and experience, so having funds for upkeep and management can be advantageous.
Ultimately, for very little cost, you can leave the person behind with some options.
If there is no life insurance or other means to clear a mortgage, these options will be limited.
When providing advice, each individual situation is different, but this is a conversation that shouldn’t be avoided or written off as there can be very real benefits. After all, if the investment is producing an income each year, it is worth protecting.
Lucy Brown is head of protection at London & Country