If your world comes crashing down, at least your house will still be standing

Hard-pressed homeowners are reluctant to meet the cost of ensuring that their loan will be paid off if they die, fall ill or lose their job. But, says Melanie Bien, peace of mind doesn't have to come at a high price if you focus on the cover that you really need

When you buy your first home, you open the door to a host of costs on top of the purchase price, such as stamp duty, solicitor's fees, surveyor's charges and fees imposed by your mortgage lender and broker. So it's tempting for buyers to cut costs where they can, and particularly on insurance because only buildings cover is compulsory.

When you buy your first home, you open the door to a host of costs on top of the purchase price, such as stamp duty, solicitor's fees, surveyor's charges and fees imposed by your mortgage lender and broker. So it's tempting for buyers to cut costs where they can, and particularly on insurance because only buildings cover is compulsory.

And a report from market analyst Datamonitor last week revealed that this is exactly what is happening with critical illness cover (CIC). Premiums rose by 30 per cent last year, and as a result, sales have stalled. CIC is also widely seen as inflexible: it pays out a lump sum that can be used to pay off the mortgage if you fall ill and can't work, but it only applies to a limited number of illnesses.

However, some form of cover is vital if you want the peace of mind of knowing that the mortgage will be paid off if you die, lose your job or fall seriously ill. The problem for hard-pressed homeowners is deciding what insurance is a necessity and what is a luxury.

"You should first look at what benefits you have actually got [from your employer, say] and then think about cover," advises Graham Beaver, associate director of financial planning at mortgage broker Savills Private Finance. "The cheapest form of insurance is life cover, then income protection and critical illness cover, and then mortgage payment protection."

You should review your cover at least every two years, and when you move house. "It is such a competitive market that prices change all the time," says Kerry Nelson at discount broker Willis Owen. "Make sure you use an independent adviser who has access to all the providers on the market. That's the only way you'll get the best policy for you."

Below are the main types of cover available, ranked in order of importance.

Life cover

This is essential if you have dependants, as it provides a lump sum to pay off your mortgage if you die. The added attraction of life assurance is that it is one of the cheapest forms of cover available. A 34-year-old female non-smoker can buy £100,000 worth of life cover over a 20-year term for £7.50 a month from Tesco Personal Finance.

When taking out cover, Mr Beaver at Savills says you should take into account the size of the mortgage balance. If you and your partner have a joint £200,000 loan, for example, and your partner would comfortably be able to pay £100,000, you could take out life cover for just the other £100,000. But if either of you would prefer the whole mortgage to be paid off if one of you died, you should both take out £200,000 worth of insurance. Ensure this covers the entire term of the mortgage.

The second consideration is the premium, which is either guaranteed to stay at the same price or not. If it isn't, it could rise. Across the market, premiums are coming down as people live longer, so keep checking that your cover is still good value.

Your employer may already provide you with life cover, so check if this is the case before taking out a policy. If you change jobs, your new employer may not offer the same terms, so again, check.

Income protection

After ensuring that your mortgage will be paid off in the event of your death, think about what might happen if you can't work because of illness or injury.

There is no financial help from the government until you have been out of work for nine months, and even then it is capped and means-tested: you must be on income support or jobseeker's allowance, and mustn't have savings of more than £8,000. Benefits cover only the first £100,000 of your mortgage, so if you meet the above criteria but have a bigger home loan, you'll have to meet the shortfall.

You are entitled to statutory sick pay (SSP), which is paid by your employer for up to 28 weeks. But the standard rate is £66.15 a week for those with average earnings of £79 or more a week, before tax and national insurance is deducted, which may not cover your outgoings. Some employers are more generous.

Work out how much you need to live on each month, and whether sick pay would cover it. If there is a shortfall, you need to consider income protection (also known as permanent health insurance), which pays out a monthly sum if you are too injured or ill to work.

There are two types of income protection policy: "own occupation" and "any occupation". The first of these pays out if you can't do your normal job and is more expensive than "any occupation"', which pays out only if you can't work at all. The cost of the cover also depends on your age, sex, occupation and medical history.

You must also decide on a deferral period (the length of time before a policy pays out). The longer this period, the cheaper your premiums, but ask yourself if you could cope financially with a prolonged deferral.

Critical illness cover

Some people prefer a lump sum to a regular income if they can't work, and this is where CIC comes in. It pays out on the diagnosis of a critical illness, such as cancer or a heart condition, and the lump sum can be used to pay off the mortgage. It is, however, expensive, tending to be four to five times dearer than life cover because the risk is that much greater.

Willis Owen's Kerry Nelson advises building CIC into your life assurance policy as this makes it "essentially cheaper". If you do opt for CIC, check the number of conditions covered (some providers are quite restrictive).

ASU cover

Accident, sickness and unemploy- ment insurance, also known as mortgage payment protection, is the most comprehensive cover available, and the most expen- sive. You don't have to take out all three elements and you may not need all of them anyway. For example, your employer may offer you accident and sickness cover, so you would only need the unemployment element.

A 30-year-old female would pay £10.67 a month with insurer mortgageprotect for £5,400 worth of cover. This policy pays out for 12 months but there is a 60-day excess period.

She could reduce her premiums by opting for just accident and sickness cover: this costs £5.67 a month with the same provider. And if she only wanted the unemployment element, that's £7.65 a month from SALARYprotect.

The disadvantage of ASU is that it usually only pays out for 12 months (unlike income protection, which pays out indefinitely until you return to work). And while income protection can be written on an "own occupation" basis, ASU can only be written for "any occupation", which means that if you can't do your present job but could do a menial one, it won't pay out.

To shop around for life insurance, try broker Lifesearch www.lifesearch.co.uk. For income protection and ASU, try Insuresupermarket www.insuresupermarket.com

'YOU NEVER KNOW WHAT'S ROUND THE CORNER. PROTECTION PAID OFF WHEN I LOST MY JOB'

Brian Traynier, 54, took out mortgage payment protection insurance (MPPI) three years ago. It was just as well he did because in April last year he was made redundant from his job in a furniture shop in Norwich - where he had worked for the previous 20 years.

"It was a shock to lose my job as it came totally out of the blue," he says. "We knew that the business had its ups and downs, but it got so bad that the shop closed down and we were all made redundant."

However, because he had taken out Norwich & Peterborough's Safeguard policy, Mr Traynier didn't need to panic about finding another job.

"The policy was a lifeline," he adds. "You have to wait a month before any payment kicks in, but after three weeks I got a temporary job in a printing company, so I didn't need to claim. But when this job finished 10 weeks ago, I received my first payment on the policy."

Mr Traynier received a monthly payment of £400 - enough to cover the mortgage on the property he shares with his wife, Lesley. Her income takes care of the bills and other outgoings. "Having the policy does ease the burden, particularly as the older you are, the harder it is to get a job. The premiums are a relatively small outlay [£24.36 a month] and you never know what's around the corner."

Mr Traynier has since got a job working for a camping shop in Norwich, so he no longer has to claim on the policy. However, he says he will definitely be keeping it going.

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