Mortgages - Is Buy to Let a Dream or a Nightmare?


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What is Mortgage Insurance?

Mortrgage Life insurance is protection against financial loss in the event of the death of the insured person. Usually life insurance is taken out so that the bereaved family will have some money, perhaps when the main bread winner dies. However, it is possible to take out life insurance on a 3rd party if you can prove that you would suffer financially if that person died.

For example, the year 2006 was Queen Elizabeth II s 80th birthday. Any company who produced items to celebrate that event, such as commemorative plates or silverware, would have suffered financially if the Queen had died before reaching 80 years.

There are different types of life insurance - whole of life policies, term insurance and endowment policies. Now both whole of life and endowment policies are actually life assurance rather than life insurance. The difference is that insurance covers you for something that might happen while assurance covers you for something that will, assuredly, happen.

Term insurance covers you if you die during the policy term, which could be 6 months, 10 years or even 35 years. This kind of policy will pay nothing if you are still alive at the end of the term. Consequently the premiums are significantly lower than in the case of life assurance policies.

Whole of life policies pay out on your death. The premiums are payable up until you die and then a previously determined sum is payable to your beneficiaries.

What is Mortgage Protection Life Insurance?

Endowment policies are for a fixed term, usually 10 years or more. The premiums are payable throughout the term and are invested. At the end of the term the policy matures and the proceeds are payable to the policy holder. In the event that the policyholder dies before the end of the term then a guaranteed death benefit is paid out to the beneficiaries.

There are also reducing term insurance policies which are often used to ensure a mortgage is paid off in the event of death. In these life policies the premiums are constant over a fixed term but the sum assured payable on death reduces over the term. The initial premium is less than for a fixed term insurance policy because of the reducing amount. In the case of mortgage protection the amount owing should also reduce over the term so the life policy would always be sufficient to repay the mortgage.

Critical illness insurance:

Critical illness insurance will cover you in the event of a serious illness such as cancer, coronary artery by-pass surgery, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. Additional conditions covered by this insurance can include aorta graft surgery, benign brain tumour, blindness, coma, deafness, heart valve replacement or repair, loss of limbs, loss of speech, motor neurone disease, paralysis/paraplegia, Parkinson s disease, terminal illness and third degree burns. Not all insurance companies will necessarily cover all of these illnesses, whilst some insurance companies will cover more; it is always worth reading the terms and conditions before you sign anything.

Critical illness insurance policies typically offer a tax-free lump sum if you are diagnosed with one of the above illnesses and meet the conditions outlined in the policy contract. The lump sum is most often used to cover the remainder of the mortgage, although can be spent on home alterations or medical care etc.

Life insurance:

Life insurance is usually taken out if your family or partner is financially dependent on your income. Life insurance can also be purchased as life assurance and in this form, can offer a method of protection cover and savings. However, most people simply use it as a form of financial protection for their mortgage and therefore their family. There are three main types of life insurance: term insurance, whole life insurance and endowment insurance. More information can be found on these forms of life insurance on the Association of British Insurers website, listed in the resources section of this article.

Mortgage life insurance:

Mortgage life insurance is essentially the same as a decreasing (lump-sum) term life insurance policy and is designed to pay out a lump sum upon the death of the policy holder, should it occur during the term of the mortgage. The size of the lump sum will decrease over the term of the life insurance policy, in the line with the outstanding mortgage repayments. E.g. As you pay off your mortgage, the amount of cover will decrease as the need is less significant.

Mortgage protection:

Mortgage protection, also called mortgage payment protection, is a type of insurance that can help protect mortgage payments and associated household costs in the event of unemployment, illness or an accident. Through mortgage payment protection, you can insure your monthly mortgage payment, monthly life premiums and the monthly cost of your buildings and content insurance. Typical mortgage protection cover could include:

* Unemployment and disability insurance cover

* Accident or sickness

* Unemployment only insurance cover

* Disability only insurance cover

Loan payment protection:

Loan payment protection policies are designed to protect the repayments to any loans you may have taken out. They work on a similar basis to mortgage payment protection, but for a wider scope of borrowing. Premiums for loan payment may be greater than those for mortgage protection.

Income protection:

In the event of unemployment, sickness or an accident, income protection insurance offers a limited income. Do make sure you understand the terms of the policy however, as the income that you received through cover may be significantly less than the income you receive through employment.

Private medical insurance:

Private medical insurance is a policy which will provide financial cover for medical treatment in the event of an acute condition. According to the Association of British Insurers, the majority of insurers define an acute condition as a disease, illness or injury that is likely to respond quickly to treatment which aims to return you to the state of health you were in, immediately before suffering the disease, illness or injury, or which leads to your full recovery.

Private medical insurance provides reassurance for people who know that treatment is available promptly should they become ill or injured.

You can find additional technical resources for this article in the technology section at:

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