New mortgage, mortgage life insurance queries

jimmyhurr · 15 May 2018 at 9:22AM

I have just applied (with my wife) for a new mortgage with Nationwide and we are now thinking about mortgage life insurance. We had a previous mortgage with Nationwide but sold our house and are now with relatives. I am self-employed (company director with salary/dividends) and my wife draws a salary from the limited company. We have no health issues and are both early 40s.

We have cover in place already as follows:

- 2 income protection policies for me only, with Aviva - deferred for 8 weeks, both paying out £1k per month. Policies run until I am 65. I've had one of the policies since 2003 before I had a mortgage, and the second one was taken out in 2007 when we had our first joint mortgage.

- 2 life insurance policies from Legal and General for joint cover on first death only both taken out in 2007 on our previous mortgage. One pays out £120k (to cover mortgage that has now been redeemed) and the other pays out £253k - calculated as the requirements until our first daughter reached 18. There is a payment waiver on both policies for me only.

Obviously our circumstances have changed and what we have in place now may not be adequate enough. My main concern is that my existing income protection policies run until I am 65 but mortgage duration is until 68. In addition, the mortgage will be for 160k instead of 120k.

In addition, we do not have critical illness cover - my income protection is good if I fall ill, but if my wife were to fall ill and could not work or look after the children, then I may not be able to work either and would still need to cover the mortgage.

Does anyone have any sage advice ? Is it worth exploring whether the existing policies can be extended - I have no idea if this is possible? Should we see an advisor?

Weighty1 · 15 May 2018 at 12:19PM

Often existing policies include Guaranteed Insurability Options (GIO's) which enable policyholder to increase the levels of cover based on certain "life events" such as the increase of a mortgage, however, typically these don't allow you to extend the term of a plan. That said, it would be worth checking with the individual providers involved just to see if that is feasible.

In respect of the critical illness for your wife, this is a very good point you've realised and one which I had been discussing with a client just a few minutes ago. The biggest issue is deciding how much cover is needed as it would be entirely dependent on which critical illness is diagnosed. You might only need to take a couple of weeks off if your wife has a heart attack but might not be able to work for years if she suffers a stroke or MS. The non-ill person being unable to work is something few people ever really consider.

It's almost always worthwhile speaking to an adviser as you'll get a higher degree of protection from the Financial Ombudsman Service if you do. Plus, they'll be able to advice on which providers offer the more comprehensive critical illness plans and the potential for certain add ons which can improve the proposition being looked at.

jimmyhurr · 16 May 2018 at 6:20PM

Thanks for your reply. I have had a useful talk with an advisory broker (LifeSearch as recommended on here) and they also suggested talking to L&G about my income protection policies. Specifically at what level they would pay out based on my income.

More to come.

Weighty1 · 17 May 2018 at 11:07AM

I've just re-read your initial post and as a company director and based on your wife taking a salary from the business you could arrange tax efficient life insurance in the form of Relevant Life Policies. This is were the business owns the plan and you and your wife are the lives assured. You'd need to have separate plans as you can't have a joint RLP but they are not classed as benefits in kind and ordinarily you expect to receive tax relief on the premiums. Compariing that against a personal plan paid out of post taxed income means they are far more tax efficient.

In regards to the income protection there should be no problem covering both salary and dividends and some providers even allow you to cover spouses salary, provided it would stop in the event of you falling ill. It could also be worthwhile considering an Executive Income Protection Plan. This works on a similar basis as the RLP, in that the business owns the plan and in the event of a claim the proceeds are taxable, HOWEVER, the premiums are also tax deductible and you can insure your pension contributions which can be a real advantage for individuals making significant company pension contributions as it'll ensure you can still retire with an income even if you fell ill 20-years before retirement. With a personal IP plan, you either limited in respect of how much you can pump into your pension due to not working, or simply wouldn't be able to take a benefit amount which would allow it.

HTH.

New mortgage, mortgage life insurance queries

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