I am a single woman and have just arranged a mortgage through my bank. The financial adviser has recommended that I buy a critical-illness policy so that my mortgage will be paid off if I cannot work through sickness. It is quite an expensive policy and I am not sure if I can really afford it.
My employer will pay me for the first 12 weeks of absence through illness but nothing after that. I also have life insurance of three times my salary through work.
When you arrange a mortgage to buy a home, you are taking on a substantial liability and should take very seriously the warning that your home is at risk if you do not keep up the payments on a loan secured against it.
There are a number of circumstances where you might not be able to afford to properly service your mortgage debt and it makes absolute sense to plan what you might do if one of those circumstances were to occur.
If you lost your job, how would you be able to pay the interest and capital repayments due on your mortgage? You might have savings which you could use to pay your mortgage costs and you should work out how long those savings might last.
If you did lose your job, how easy or otherwise would it be for you to get further employment?
You might consider a form of insurance that pays you an income if you are unable to work through illness, disability or redundancy. Often erroneously called accident, sickness and unemployment insurance, it is not actually unemployment cover, it is redundancy cover. This type of insurance generally pays out for a maximum of 52 to 104 weeks so it is not permanent insurance. It tends not to be cheap and may contain certain exclusions about pre-existing conditions that would make it less attractive to you.
After your employer has stopped paying your salary if you are off work through sickness or disability, what will you do then?
A form of insurance called income replacement insurance (previously referred to as permanent health insurance – another poor title for the product) might be worth considering. This will pay you a regular income after the 12 weeks of pay from your employer has ceased. The payments continue until you return to work, retire, the policy expires or you die. Usually, the policy term is through to your intended retirement age so it should cover the term of your mortgage.
Income replacement insurance might be worth considering to ensure that you have sufficient income to pay your mortgage costs at the very least. The amount of income cover you need depends on your particular circumstances and you may need to have enough income to pay all your other bills as well. You should ask yourself the question, how long might I be able to pay the mortgage costs if I was unable to work through illness or disability?
Your bank adviser has recommended that you take out critical-illness cover but you should be absolutely sure you understand what that insurance will cover. I can state categorically that it will not pay off your mortgage if you are off work through sickness. That is simply far too loose a definition of when a claim will be entertained under such a policy.
You will have to have suffered a critical illness that satisfies the very specific policy definitions for the sum assured to become payable and for it to pay off your mortgage. That usually means having suffered a stroke, a heart attack or one of the specific cancers defined in the policy.
Even what I have just stated is a weak definition of the circumstances where the sum assured under the policy will become payable.
You should insist that your bank adviser spells out exactly what is covered by the policy. You are quite correct in saying this type of cover does not come cheap.
I am not saying that you should not buy critical-illness cover but you should first consider the alternatives. It is all about managing risk and every adult needs to give serious consideration to all the risks they face.
One way of dealing with the risks of dying, being off work sick through illness or disability, suffering a critical illness or redundancy is to buy insurance but you should take into account other strategies. Of course, your budget will also be important.
Do not be overinfluenced by the spurious case study stories of financial salespeople unless they are in context to you. Do consider risk, however, and insure accordingly if it is affordable.