Insurance is a critical part of securing a mortgage financially and protects an individual in the areas of life, sickness, accident, income protection and more.

Home, Buildings And Contents Insurance

For most homeowners, a house or flat is the most valuable asset that they own. And, whether you own or only rent your home, the value of the contents of your property is likely to be the second most valuable entity that you possess.

Home Insurance Cover

A wide variety of home insurance policies are available to cater for the needs of homeowners, tenants and landlords, so it might come as a surprise to learn that a quarter of all UK households are not covered by any form of home insurance.

Types of Home Insurance

Three broad categories of home insurance policies are available – buildings insurance, contents insurance and policies combining buildings and contents insurance.

Buildings Insurance

Buildings insurance covers the fabric of your home. Its main purpose is to pay for rebuilding or repairing the structure of your home if it gets damaged in any way. Mortgage lenders almost always insist that borrowers purchase buildings insurance, in order to protect their investment in the property.

Most buildings insurance policies cover the following areas:

However, insurers are becoming increasingly fussy about insuring properties against flood damage or subsidence, in some geographical areas. They may charge higher premiums in these areas and insist on large excesses for this type of insurance or, in some cases, may even refuse insurance against these risks.

Buildings insurance policies cover permanent fixtures and fittings such as bathroom items and fitted cupboards. These policies usually cover garages, sheds and other outbuildings and may also cover garden walls, paving, gates and fencing.

Contents Insurance

Home contents insurance policies vary widely in their scope but should offer cover for all items that are not included in the permanent fixtures and fittings of the property.

Contents insurance policies should cover the following areas:

Some items may or may not be covered, depending on the terms of the policy. Examples include mobile phones, watches, bicycles and sports equipment such as rackets, golf clubs and shotguns.

The majority of home contents insurance policies also include liability insurance which insures against the risk of accident or injury to third parties whilst visiting the property.

Many insurers offer ‘new for old’ contents insurance policies. If an item (e.g. a television set) is damaged or stolen then these policies will pay for an equivalent new model rather than one of the same age as the original.

Combined Home Insurance

Most insurers offer combined home insurance policies. As the name suggests, they include both buildings and contents insurance cover. One advantage of a combined home insurance policy that is often overlooked is that insurers can’t argue about paying out on marginal items that might be categorised either as fixtures and fittings or as part of the home contents.

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Accident & Sickness Insurance

If you apply for a personal loan, credit card, store card, mortgage or almost any other kind of credit agreement, you are likely to be offered accident and sickness insurance, also known as payment protection insurance (PPI), to go with the agreement.

Is Insurance Necessary For Accident & Sickness?

The basic tenet of an accident and sickness insurance policy is that it will cover the monthly repayments of your debt should you become incapacitated and unable to work as a result of accident or illness. Although insurance policies of this type might appear to be a prudent option, they’re not compulsory. In addition, accident and sickness insurance policies have acquired a poor reputation, in recent years.

Issues Related To Accident & Sickness Insurance

Accident and sickness insurance policies have come under fire for two main reasons:

Firstly, the costs of the policies are often very high in relation to the benefits offered. This results from the fact that financial institutions marketing personal loans or other financial products are in a strong and convenient position to sell an add-on accident and sickness insurance policy at the same time as the main product. In these circumstances the customer would have to make significant effort to source accident and sickness insurance from an alternative vendor, so, in reality, competition in this area is weak.

Secondly, accident and sickness insurance policies are often written in a way that makes them difficult to understand. Furthermore, many life insurance quotes contain a large number of exclusion clauses that work against the interests of the policyholder when the time comes to make a claim.

The result of this combination of factors is that the margins are very favourable to providers of accident and sickness insurance and can be as high as 80 percent!

Alternatives to Accident & Sickness Insurance

What are the alternatives to accident and sickness insurance?

Critical Illness Insurance

Critical Illness Insurance is a type of insurance policy that will pay a lump sum to policyholders if they suffer serious illness or require certain types of surgery.

Most critical insurance policies include a detailed list of which conditions are covered by the policy. The list is usually quite extensive and can include heart disease, stroke, cancer and kidney malfunction. Some policies include cover for heart bypass surgery and organ transplants.

The main fact to remember with this type of policy is that in order to be covered for a particular condition, it must be included explicitly in the list contained within the policy. Some insurers are willing to add less common conditions to a policy, on request, but this might result in an increase in the premium charged.

Income Protection Insurance

Income Protection Insurance, also known as Income Replacement Insurance or long term disability insurance, offers protection against loss of earnings. This type of policy pays out, usually monthly, for the period that the policyholder is unable to work. Unlike critical illness insurance, income protection insurance policies usually have relatively few exclusion clauses, although as with any insurance policy, it is wise to read the small print before signing up.

Critical Illness Insurance

Critical Illness Insurance, sometimes called Dread Disease Insurance, will pay out a lump sum if the policyholder is diagnosed with a serious medical condition.

Critical Illness Insurance Options

More than sixty insurance providers offer critical illness insurance cover and life insurance quotes, so policies vary considerably as to what exactly they offer.

Policies that follow Association of British Insurers (ABI) guidelines cover a minimum of seven core conditions:

In addition, some heart conditions such as angina may be excluded from certain critical illness cover policies.

As always, when dealing with insurance providers, it pays to read and understand the small print before selecting the most suitable critical illness policy option.

Who Should Choose Critical Illness Insurance Cover?

The type of insurance cover required by individuals very much depends on their personal circumstances. For example, taking out critical illness insurance to pay off a mortgage makes more sense than buying life insurance for a single person without dependents. However, for a person with a family, a combination of payment protection insurance, private medical insurance and life insurance could be more appropriate.

Making a Critical Illness Insurance Claim

Most critical illness policies offer a one-off tax-free lump sum rather than payment by monthly instalments. Depending on the nature of the policy, the maximum possible payout from a critical illness claim could vary from £100,000 up to £250,000. Once the nature of the medical condition has been confirmed to the satisfaction of the insurance provider, payment should be made to the policyholder within 28 days. However, settlement of the claim may take longer if assessment of the degree of disability suffered by the policyholder is required in order to decide the value of the payout.

Further Information about Critical Illness Insurance

The Association of British Insurer's website provides general information about critical illness insurance (including a statement of best practice).

The ABI website also gives details of other forms of health and protection insurance that are available to consumers.

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Income Insurance Protection

Income insurance, also known as income protection insurance, income replacement Insurance, permanent health insurance or long term disability insurance, is a type of insurance that provides a regular income in the event of you becoming unable to work.

Income Insurance Conditions

Although the income insurance concept is quite simple, variations between policies from different providers do exist; in particular, the definition of being ‘unable to work’. Three common definitions of being unable to work are in common use:

When choosing an income insurance policy, you should decide whether or not you would be willing to undertake a less desirable job, if you couldn’t continue to do your current job. The level of income insurance premiums reflects the probability that you would make a claim. Therefore, the more flexible you are about accepting alternative employment, then the lower your premiums should be.

Most income insurance policies will pay out if you have a genuine reason as to why you’re unable to work. However, some policies have exclusions for incapacities resulting from HIV/AIDS, drug abuse, self-inflicted injuries and, in some cases, even pregnancy. The usual caveats relating to choice of insurance apply – read the small print before choosing an income insurance policy.

Types of Income Insurance Premiums

Premiums for income insurance policies will either be fixed (i.e. the monthly premium will remain constant for the duration of the policy), or variable (i.e. the monthly premiums start at a relatively low level and increase as the policyholder gets older). Premiums will be lower if the policy includes a 60 or 90 day excess, i.e. the policyholder has to be incapacitated for the length of the excess period before being able to make a claim.

Who Needs Income Insurance?

If you are self-employed, taking out income insurance makes a lot of sense, as you’re unlikely to have any other means of paying your regular housing and living costs if you become incapacitated and are unable to work. Large companies and public sector employers are likely to offer some form of sick pay scheme to their staff, so income insurance is likely to be less important to these employees than to the self-employed.

Alternatives to Income Insurance

The choice of type of personal insurance depends very much on the person’s own individual circumstances. Factors that could influence the decision include whether you are looking for a regular monthly income or a lump sum payout, whether you have dependents and whether personal health is an issue. Private medical insurance, critical illness insurance, life assurance or accident and sickness insurance all offer possible alternatives to income insurance protection.

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Mortgage Payment Protection Insurance (MPPI)

Mortgage Payment Protection Insurance (MPPI), to give it its full title, is a type of insurance that is commonly sold to borrowers when they take out a mortgage. An MPPI policy is designed to cover the cost of mortgage repayments if the borrower becomes unable to work as a result of sickness, accident or unemployment.

Mortgage Payment Protection Insurance Basics

MPPI is not compulsory, but some lenders will put pressure on borrowers to take out a policy before confirming a mortgage offer. Reputable MPPI policies will start to pay out one month after confirmation is received that the borrower has ceased working as a result of sickness, accident or redundancy. Payments will continue until the borrower is able to return to work or for a period of twelve months, whichever is the shorter time.

The terms and conditions of MPPI policies are often complex and can involve many potential exclusions, so reading the small print is essential when choosing an MPPI policy.

Mortgage Payment Protection Insurance Criticisms

Complaints about MPPI have been widespread for several years and the Competition Commission is currently reviewing the whole area of payment protection insurance.

The biggest single complaint against MPPI is that mortgage lenders are selling the insurance to a captive audience. Premiums are often excessive when compared to those charged by independent brokers for similar policies. The Office of Fair Trading (OFT) has estimated that for every pound taken in payment protection premiums, only 19 pence is paid out to cover customers’ claims. This suggests that some companies are profiteering on a large scale.

The high level of premiums coupled with the complexity of MPPI policies and the range of exclusions involved suggests that many customers are not getting a fair deal from this type of insurance.

Do You Need Mortgage Payment Protection Insurance?

The obvious question to ask when considering MPPI is whether it gives appropriate protection in your particular circumstances.

Ask yourself the following questions before you decide whether you need MPPI:

If after answering these questions you do think that you need MPPI, be sure to shop around. Talking to an insurance broker or an independent financial adviser is likely to be helpful.

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