Wednesday, January 30, 2008

Confused About Mortgage Insurance? Here Is Some Help

Confused About Mortgage Insurance? Here Is Some Help by Robert Palmer

When taking out a mortgage, you will need various types of insurance. For example, to cover your monthly payments - in case you get ill - and home insurance- in case it burns down etc.

Household Insurance

You need to insure the building and your possessions. Your mortgage lender will probably try to get you to take their own policy. Most people used to take these because it was easier, without having to make dozens of calls to find a cheaper option.

Shop around and save yourself thousands by avoiding tie ins and bundling.

Rebuilding costs are not the same as the market value of your home. Often they're less than half - for example they don't include the cost of the land.

Don't underinsure your contents and possesions. Even old furntiure etc will be expensive to replace. Be realistic about the replacement costs. For high value items, antiques etc, get an independent evaluation.

Mortgage Payment Protection Insurance

Anyone who has mortgaged - or remortgaged - since 1st October 1995 is now only eligible for state assistance for nine months after becoming unemployed or disabled. Even then any state assistance would be means tested and will only cover the interest payments i.e. not endowment payments or capital repayments.

What you need to cover you is Mortgage Payment Protection Insurance. At the time of writing only one in five mortgage payers has this type of policy - though there are now moves by the government to make them compulsory.

Life Insurance

There are various types of life insurance. However the principle for each variation is the same. In the event of your death your dependents will receive a sum of money in compensation ie as replacement for your earning power. Unless you've got dependents or another good reason to have it, be wary. Life insurance is one of the few remaining ways for IFAs and brokers to make very big commisions.

Life insurance gets more expensive the older you are. You probably want to buy level term assurance. This fixes how much you pay - and how much your beneficiaries will receive.

The benefit is that you won’t be stung for a large premium when you're older. The downside is that the amount your beneficiaries receive will decrease with inflation. Mortgage Protection Decreasing Term Assurance

This is another type of life insurance. It works by recognizing, that the main purpose of insuring your life is to pay off your mortgage

Because what you owe decreases with time (ie as you pay your mortgage off) so does the amount of cover provided and so does the premium you have to pay every month. Hence the "decreasing". It's considered to be a cheaper form of cover than straightforward life insurance.Permanent Health Insurance

This is an insurance policy that will pay you a percentage of your income, often until retirement, should you become unable to work due to ill health - usually regardless of the causes

Your employer may offer some type of insurance but you would need to check what it is carefully. No matter how much they may love you, it's very unusual to carry on being paid more than 6 months after someone's stopped working because of ill health.

You normally get 50% to 60% of your income from a Permanent Health Insurance pay out and it's inflation proof.

Critical Illness Insurance

This type of insurance pays you a lump sum (i.e. a once off) if you get one of a limited number of illnesses. Critical Illness polices may be demanded and even useful to provide cover for "business protection".

Mortgage Indemnity Insurance

You pay for this but be aware that it only protects the lender if you can't pay back the loan. It's often compulsory particularly if the loan to value ratio of your mortgage is above 95% - which can hit first time buyers hard

Some mortgage lenders charge it from an 80% loan to value others don't charge it at all - though in these cases it may be hidden and you are paying for it through a higher interest rate.

How to avoid paying Mortgage Indemnity Insurance

Some mortgage lenders don't seem to charge it - but are actually hiding it by making you pay a higher interest rate or some kind of tie in.

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