Insurance - what will I need?

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There are many different types of insurance you should consider in order to protect both yourself and dependants and also your property. This guide will look at these in two sections - first insurance's that will relate to the property specifically and secondly insurance for yourself and dependants.

Property insurance | Personal insurance | Level Term Assurance | Mortgage protection | Accident, Sickness and Redundancy/Unemployment Insurance | Permanent Health Insurance

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There are many different types of insurance you should consider in order to protect both yourself and dependants and also your property. This guide will look at these in two sections - first insurance's that will relate to the property specifically and secondly insurance for yourself and dependants.

Property Insurance

It is obviously important to insure the 'bricks and mortar' and indeed this will be a requirement of your mortgage lender. Most lenders will arrange this insurance themselves and pass the premium on to you, the borrower, usually by adding 1/12 of the annual premium on to each month's mortgage payment. The amount of insurance cover required will be calculated by the surveyor who inspects the property on behalf of the lender. This will not necessarily be the purchase price as the insurance value required will be the rebuilding cost of the property in question and could be higher or lower than the property value.

By allowing the lender to arrange the insurance of the property you are provided with an easy way to pay (i.e. the monthly premiums can be included with your mortgage payment). You will also normally be guaranteed that the level of cover will remain sufficient year on year as the level of cover will normally be index-linked. However, you will not necessarily obtain the cheapest or most competitive terms and you will nearly always be able to find a cheaper policy elsewhere. Most lenders will not offer you any alternative to their own buildings insurance policy and this will often be arranged without discussion, however, most lenders will allow you to arrange your own policy if you ask, provided that the cover is equal to or better than their own policy. Always make sure that policy includes a provision for index linking as this will ensure that the property does not become under-insured in the future. Speak to a local general insurance broker and obtain some alternative quotations. Once you have found an alternative insurer, provide your lender with the details and they will normally be able to cancel their own policy and adjust your monthly repayment accordingly.

In addition to the buildings insurance you will need to consider contents insurance. Again most lenders will have their own policy to cover contents as well as the building and it is normally possible to pay the premium monthly with the mortgage payment. Nevertheless, it is again sensible to shop around and obtain alternative quotations.

Whilst it is sensible to obtain alternative quotations for your buildings and contents insurance you should also be aware that some mortgage products make it a condition that you take the lenders own policies. In these cases you need to way up the advantages to be gained from the particular mortgage product against the potential cost in terms of savings that could be achieved by arranging the insurance elsewhere.

Personal Insurance

It will be a requirement of many lenders that you take some form of life assurance to ensure that the mortgage will be repaid in the event of your death. Once again many lenders will try to steer you towards their own products but you should be aware that, as with buildings and contents insurance, the premiums can vary considerably from one insurance company to another. You will also find that most mortgage lenders are now tied to one insurance company and so they can only recommend policies from that one company rather than from the range of products available in the market generally. There are also a number of different types of policies and different ways in which the insurance can be written which will also affect the premiums payable.

By all means allow your proposed lender to provide you with a quotation but you should also obtain some comparisons elsewhere. The best way to achieve this is to consult an Independent Financial Adviser who will have access to products from a range of companies and who is required by law to provide you with 'best advice'. This means recommending the policy that best suits your needs (this is not necessarily the cheapest policy) and he must be able to justify why he has recommended one policy rather than others in the market. You will usually find that there will be no charge for this service as the Adviser will receive commission from the insurance company if the sale of the policy proceeds. It is worth taking a little time looking at the various types of insurance policy available so that you are armed with some knowledge when talking to your lender or adviser. The possible range of policies that you should consider is as follows;

a) Level Term Assurance

This is probably the most common type of policy sold when arranging insurance cover for mortgage purposes. With this type of policy the amount of cover is set at the beginning and remains unaltered throughout the term of the mortgage. In addition the premium is set on day one and takes account of age, health, occupation and term of the policy - once set, provided the policy premiums are maintained, they cannot be altered. The policy will be written for a set term and this will normally coincide with the mortgage term. If the insured dies at any time during the term of the mortgage then the sum assured will be paid and this will be used to repay the mortgage. If an interest only mortgage is being taken then this type of policy could be considered as the level of the mortgage will remain unaltered throughout the term. However, if an endowment policy is being used as the repayment vehicle then the endowment policy will include an element of life cover sufficient to repay the mortgage, making Term Assurance unnecessary. Equally if the mortgage is being arranged in conjunction with a Personal Pension Plan then the Term Assurance will usually be taken out as Pension Term Assurance as tax relief can then be obtained on the premiums paid.If a repayment mortgage is being considered then the level of the mortgage debt will reduce throughout the term and a Level Term Policy could end up paying out more than the mortgage debt. The surplus would then pass to your estate. Because the level of the cover remains constant this type of policy will be more expensive than a Mortgage Protection Policy.

b) Mortgage Protection

This type of policy is designed to be used in conjunction with a repayment mortgage where the debt is reducing throughout the term. As with Level Term Assurance the monthly premium is set at the beginning and will remain constant throughout the term. However, unlike Level Term Assurance the level of cover under this type of policy also reduces in line with the mortgage debt. For this reason this type of policy will be cheaper and may be all you need if you are considering a repayment mortgage.

c) Accident, Sickness and Redundancy/Unemployment Insurance

This type of policy has become increasingly popular recently since state benefits for the unemployed or long term sick have been seriously curtailed.For new mortgages taken out after October 1995 (for this purpose a re-mortgage counts as a new mortgage) the DSS will now pay nothing towards the mortgage for the first 9 months of sickness/unemployment. Thereafter you will receive payment at a standard rate set by the Department of Social Security. If your actual mortgage interest is higher than this pre-set rate then you will be required to find the shortfall.

This obviously means that if you wish to protect yourself against being unable to work you will need to arrange your own private insurance policy to cover yourself. There are a multitude of different policies available and the terms vary considerably as does the cost. Many lenders now sell their own policies but they are also available from Insurance Companies. Most of these policies will pay for the first one - two years of unemployment/sickness and they will also normally allow you to cover other associated costs such as endowment policy or life assurance premiums. It is important that you study terms of the policy in detail so that you understand exactly what is covered. These policies are designed to provide short-term cover and you should also consider Permanent Health Insurance if you wish to protect yourself against long term sickness. The next section deals with these policies in more detail.

d) Permanent Health Insurance

Permanent Health Insurance is designed to provide cover against long term or permanent disablement or sickness. These policies are designed, not only to protect the mortgage payment but also to replace your income in the event that you are unable to work due to long term sickness or disability. When you are looking at a new mortgage it is always sensible to review all your insurance requirements to make sure that you have adequate cover and consideration should be given to this type of policy. State Benefits are constantly being eroded and the State will now only offer benefits at the very lowest level of subsistence. A Permanent Health Insurance Policy really could make a huge difference to your way of life if you were unfortunate enough to suffer from a long-term illness.

These policies are generally sold by insurance companies and, as with most types of insurance, the terms and costs vary considerably. However, a reasonable level of cover can usually be obtained at fairly low cost. Because of the complexity of these policies it is not possible to go into much more detail here but I would recommend that you talk to an Independent Financial Adviser about this type of cover.

Please note that the information given above relates solely to the provision of insurance in relation to the mortgage and property purchase. There may be a requirement for other insurance cover depending on your own personal circumstances. You should talk to an Independent Financial Adviser to ascertain your own personal requirements.

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