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  • FIRST POST
    • losmith80
    • By losmith80 11th Jul 17, 2:47 PM
    • 1Posts
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    losmith80
    Mortgage and income protection for self-employed
    • #1
    • 11th Jul 17, 2:47 PM
    Mortgage and income protection for self-employed 11th Jul 17 at 2:47 PM
    My partner and I are about to buy our first house. We are both self-employed (directors of the same company), and we'd like to take out some insurance to ensure we can pay off the mortgage in the event of something stopping us from working. We have two children with another one on the way. We'd look to protect my husband's income as he works more than I do (at present).

    I've tried to understand the differences between income protection insurance and mortgage protection insurance, but I can't seem to get a good answer for people who are self-employed. If we just take out the insurance for my partner, does it just pay his half of the mortgage (we will own the house jointly)? Is it based on his shareholding in the business? Or can we take out joint protection? Can these insurances cover us if changes to the wider environment (eg policy changes) mean that we can't get any work - as we're self-employed, we don't get redundancy pay or support over fallow periods.

    Our main concern is that we'd be able to pay the mortgage. We would be able to draw on family support to cover other bills in the short term, but one of us would struggle to find enough work if we were left with three children on our own.

    If anyone can help or point to the right information online, I would greatly appreciate it. I callled the Money Advice Service but the 'advisor' just seemed to be reading out stuff from the internet, completely useless.

    Thanks
Page 1
    • ACG
    • By ACG 11th Jul 17, 10:31 PM
    • 15,788 Posts
    • 8,083 Thanks
    ACG
    • #2
    • 11th Jul 17, 10:31 PM
    • #2
    • 11th Jul 17, 10:31 PM
    It is probably worthwhile sitting down with a mortgage or financial advisor.

    Life insurance/term assurance - etc pays out usually a lump sum if one of you die. Nice and simple.

    Critical Illness - this pays out a lump sum if you get one of around 50 conditions (cancer/stroke/heart attack etc), you would need to meet the definition in order to get a payout.

    Income protection gets a little more complicated due to the names.

    So Income protection in its truest sense, will pay out a monthly amount if you are unable to work due to illness. There is no definition of an illness, so it could be a stroke/cancer/bad back/stress etc. This is usualy capped at around 60% of your gross annual income.

    Income protection is sometimes also known as MPPI/ASU (mortgage payment protection/Accident Sickness unemployment). This would payout an amount usually linked to your mortgage - ie if your mortgage is £500 a month, then this could cover you for up to £500 a month.

    Not all of them would pay for unemployment, it would usually need to be that your company is involuntarily wound up before it would pay out.

    The important thing to note is that all of them are stand alone policies and although they may be taken out to pay a mortgage, they are completely seperate. If life insurance paid out or income protection paid out or even mppi, the money could be used to pay bills or the mortgage. But it could also be used for sex, drugs and fast cars.

    Its not complicated as such, but it probably helps to have someone who can go through it all with you in detail.
    I am a Mortgage Adviser
    You should note that this site doesn't check my status as a mortgage adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
    • Chris Pollard
    • By Chris Pollard 13th Jul 17, 1:28 PM
    • 87 Posts
    • 33 Thanks
    Chris Pollard
    • #3
    • 13th Jul 17, 1:28 PM
    • #3
    • 13th Jul 17, 1:28 PM
    I think ACG has covered this of really well for you losmith (and that's not meaning to appear patronising ACG)

    The Income Protection (IP) and not MPPI would probably give you broader protection as it won't just be the mortgage that could be problematic if either of you cannot work. The insurer will take into account the salary and dividends you draw from your business. Some of the product also include valuable additional services similar to those the employees have - helplines, access to legal advice, and so on.

    You can flex the waiting period before benefits start depending on a) savings you might wish to replace lost income due to illness and b) affordability (the longer the waiting period the lower the cost).

    It is always worth talking to a financial adviser - not only are they experts in this area, but they also have easy access to the insurers.

    Most people think "life" cover first, then the lump sum "critical illness" and then income protection. In my opinion this is often the wrong way round. Statistically there is more chance of claiming on IP, than either of the others - and for that reason it is more expensive, but I'd start with IP and Life and if you can afford some critical illness, then great.

    Good luck
    • Emma Drewberry
    • By Emma Drewberry 26th Jul 17, 7:04 PM
    • 9 Posts
    • 4 Thanks
    Emma Drewberry
    • #4
    • 26th Jul 17, 7:04 PM
    • #4
    • 26th Jul 17, 7:04 PM
    Hi losmith80,

    I hope you're well.

    Firstly, it's important to understand that Mortgage Payment Protection Insurance is generally seen as a short-term stop gap and usually pays out for a maximum of 12 of 24 months per eligible claim. This will depend on your policy.

    If you were, god forbid, to suffer anything very serious that would need you to be off work for more than this period you'd be left without a way to cover your mortgage.

    While it's possible to get Income Protection that's short-term (these are seen as budget plans), the best policies will pay out until a pre-determined policy cease age, which is usually set to your retirement age.

    In these long-term Income Protection plans, if you fell sick tomorrow with an eligible condition and could never work again, it would pay out right up until that cease age.

    As Chris Pollard has said, Income Protection is linked to your income, whereas Mortgage Payment Protection is linked to your mortgage.

    With Mortgage Payment Protection, the amount you can cover is typically capped at 125% of your monthly mortgage repayment, while Income Protection will be capped at a maximum of 60% of your income (salary + dividends, in your instance). For most people, Income Protection therefore offers a larger benefit.

    At the end of the day it tends to be about budget. Obviously, a plan with a long-term payout and a higher benefit costs more than one with a lower benefit and a short-term payment period.

    If you were to opt for Income Protection, the way it works is that you both get separate Income Protection policies to cover your own separate incomes from the business.

    Generally speaking, self-employed people do not tend to benefit from a plan covering unemployment. This is because, even if you have no work coming in because the economy changes, you're still technically an employee of your company.

    I'm not sure if you're aware, but as directors of your own company you may actually be entitled to have Executive Income Protection, which is Income Protection paid for by your company. This can have tax savings, as the premiums will often be considered an allowable business expense (although consulting your local tax office is prudent in this area to stay on the right side of the rules!).

    However, with Executive IP, as you may get tax relief on the premiums the benefit is paid into your company and is paid to you through PAYE and is taxable as income. To compensate for this, you can insure a higher proportion of your income to take into account the amount that will be taken as tax.

    With non-executive Income Protection, the benefit is paid tax-free because you're paying the premiums out of income you've already been taxed on. Again, consulting your accountant or the local tax office is best practice here.

    Also, you may want to consider Life Insurance should one of you pass away during the life of the loan. Life Insurance is fairly simple to understand, but you might like to know that self-employed people can also get Life Insurance paid for by a company. This is known as Relevant Life Insurance and can offer significant savings for directors.

    I hope this helps.
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