With interest rates higher than they were just a short while ago, and little prospect that they will fall back for some time to come, it could be worthwhile checking that your mortgage protection insurance is adequate.

Many forms of mortgage protection insurance actually reduce in level each year. This is because the outstanding balance on a repayment mortgage normally reduces (at a slower rate in the early years than later on) so that less money is outstanding, and needs to be covered by the life insurance, as time passes.

However, a certain rate of interest has to be assumed when the insurance company calculates the speed at which the mortgage principal will reduce, in order to assess the level of insurance required, each year. So any increase in the actual rate above that expected could, unless repayments are increased adequately to compensate, slow the rate of capital repayment. This might mean that the life insurance no longer covers the entire loan.

It is a simple matter for a financial adviser to check this up for you.

However, for some families there could be an added complication. Over the years, with rapidly increasing house values, many have taken the opportunity to increase their mortgage in order to pay for home improvements, extensions and perhaps other purposes including financing school fees.

Unless life insurance arrangements were checked at the time (or even if they were) it is worthwhile checking now to ensure that you have the right level of cover in place.

The death of a mortgage payer – and today that usually means more than one person within a relationship – is not the only event that can give rise to difficulty in ensuring that mortgage repayments can continue. Long term illness can also have a devastating impact on family finances, as can redundancy.

In addition to mortgage protection life insurance, many people also take out what is often called ASU (accident, sickness and unemployment) insurance, to guard against these risks. This will usually provide sufficient to cover repayments for one, or possibly two, years.

However, it will not be adequate to cover other housing and living costs such as council tax, utilities, food and so on, nor will it extend to provide an income over the longer term, if incapacity lasts for several years.

In addition, unless the cover is increased along with any additional loans that may have been taken out, it will most probably be inadequate to cover the entire repayment. You should also be aware that some ASU schemes will specifically exclude unemployment cover where the individual is self employed or works for a family business.

Regular reviews of your financial arrangements are always important; perhaps current market conditions make this even more true than usual.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact Robert Bruce Associates.

Posted in: Monthly Newsletters  Tags: mortgage protection, insurance required, home improvements, long term illness

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