1. Buildings insurance

What does it cover?
The devastation caused by the recent flooding in Gloucestershire, is a very real example of the purpose of buildings insurance. This type of cover protects the structure of your property should it be damaged by events such as fire or extreme weather like flooding, winds and even lightening.

How is it charged?
The premiums you pay will be based on how much the property will cost to rebuild rather than the economic factors of house prices. So the rebuild cost of an end terrace three-bed home will be the pretty much the same whether it is based in Mayfair or Macclesfield. You can estimate your home’s rebuild cost using the calculator on the Association of British Insurers’ website at www.abi.org.uk.

What are the exclusions?
Weather damage to fences and gates are typically not covered and if you have been away from home for over a certain time period, say 40 days, claims will also be invalid. The excess payable on claims for subsidence will be in the region of £1,000.

Do I need it?
Yes – everybody does. If you have a mortgage, buildings insurance is compulsory as your home constitutes the security for the lender’s loan. “If you are buying your first home, the lender will want to see that you have buildings cover in place before it releases the advance,” says Malcolm Tarling at the ABI.


2. Contents insurance

What does it cover?
If you could pick up your home and turn it upside-down, everything that fell out would come under contents insurance, although usually the buildings and content policies are sold along each other and called ‘home insurance’. On its own, contents insurance covers damage, theft or loss of your home’s contents.

How is it charged?
Most insurers simply ask you to tot up the value of what it would cost to replace all items – not, of course, what they are worth now – and offer cover for that amount. “Several insures now don’t have a cap on general cover at all; they will just ask you to declare items over a certain value separately,” says Tarling.

Your postcode area and the security of your home – a working alarm and five-lever mortis lock for example – will also determine your premiums which can be paid monthly or yearly.

What are the exclusions? Again, if your home is vacant for more than 40 days, you may not be covered for contents – or if you have left yourself open to a theft by leaving doors unlocked.

Do I need it?

Unlike the bricks and mortar of your home, they are your contents so it’s your call. However, if you were burgled or flooded, the items that took a lifetime to accumulate would have to be replaced in one swoop.

3. Life insurance

What does it cover?

As it says on the tin, life insurance covers your life. So if you die, a lump sum is paid out to the beneficiaries, which will usually be your family. Decreasing term life insurance covers only the outstanding balance on your mortgage so the pay out will decrease every year. This product therefore only works in tandem with a repayment mortgage. Level term cover pays the same throughout the policy.

To coincide with a typical mortgage term, life insurance premiums are payable for 25 years. If you survive during this time and pay off your mortgage, you will be back to square one – with your life intact of course.

How is it charged?

The amount you want to cover – or the amount paid out on death – is called the ‘sum assured’ and could be in the region of say, £250,000. The monthly premiums you pay for this sum assured will be priced quite coldly on the likelihood of you dying within the next 25 years. This will be based on gender, health (such as if you are a smoker or overweight), occupation and your family’s medical history.
 
What are the exclusions?

There are no grey areas between being alive and dead so in turn life insurance comes with no standard exclusions. However if you commit suicide, you will have to wait until12 months has passed from opening the policy if you want your family to receive the payout.

Do I need it?

“If you are a young, single homeowner with no dependants and struggling to make ends meet, there will be more useful insurances than life insurance,” says Matt Morris at IFA, LifeSearch. “Of the two Ds you need to think about, it will be debts rather than dependents.”

For a childless couple living together, you will need to think how the other would survive paying the mortgage on one income. Life insurance could be a good idea for the highest earner, or you could take joint policy whereby payment is received on the first death.

If you have a family, life insurance is a must. During such a traumatic time, the last thing you’ll want to think about is working more hours, the cost of childcare or even selling your home.

What is a ‘whole of life’ policy? These are policies that don’t have a term – they run until you die, whatever age that may be. But of course, as dying under this policy is certain, premiums are significantly more expensive. Some policies include an investment element where the premiums increase over time.


4. Critical illness insurance

What does it cover?
The ABI lists eight core conditions that all insurers must cover, which include cancer, multiple sclerosis, kidney failure and major organ transplant. Additional conditions covered include blindness, loss of limbs or third degree burns. As with life cover, you choose a sum assured and pay every month during the course of your mortgage. In the devastating event you have to make a claim, you will be paid your chosen sum assured as a lump sum.

How is it charged?

Like life insurance, critical illness is priced on your health at the time of taking the policy and will then be charged monthly. If you stop making the payment, cover will cease after 30 days. And if you leave an existing condition off your application, you may get nothing on claiming.

What are the exclusions?

The exclusions to critical illness insurance are even grimmer than the illnesses themselves. For a successful claim, your illness will have to meet the insurer’s own definition. So a stroke might have to result in ‘permanent symptoms’, cancer should have reached ‘beyond early stages’ and a heart attack might mean part of your heart has to die. Self-inflicted injury and AIDS/HIV are also usually excluded from the critical illness policies.

Do I need it?

“In insurance terms – and arguably in life terms too – the worst thing that can happen is that you contract a critical illness and continue to live,” says Harrison, chief executive of price comparisons site, Insurancewide.co.uk. “Not only can you not earn, you will become expensive [as you will need carers and equipment].Therefore, whatever your position in life, critical illness insurance is a very good idea.”


5. Mortgage Payment Protection Insurance (MPPI)

What does it cover?

First off, MPPI is not to be confused with Mortgage Protection Insurance (MPI), which will pay off just your mortgage if you die (basically MPI is another name for the decreasing term life insurance). Instead MPPI covers your mortgage repayments each month, in the event of you becoming sick, having an accident or losing your job – hence the policy is also sometimes referred to as ASU (Accident, Sickness and Unemployment).

Payment Protection Insurance (PPI) is effectively the same product but – minus the ‘Mortgage’ – is just designed to cover loans and credit card repayments.

What are the exclusions?

With these products, there are plenty. In fact, only 15 per cent of the money paid in to policies is paid out to customers, according to the Office of Fair Trading. MPPI typically excludes pre-existing conditions as well as new conditions if they are stress or back related – despite the fact that these are problems that account for two thirds of all claims. Bear in mind also that MPPI and PPI are ‘any occupation’ policies, which means that it will only pay out if you are unable to work in any job at all, not just your previous occupation.

If you do qualify, MPPI will pay out for a year, but typically after an initial deferment or ‘excess’ period of between 30 and 60 days. Terms and conditions can also be changed with 30 days’ notice.

How is it charged?

These products are ‘one price fits all’ insurances. They are charged per £100 of cover – a typical rate is about £5 per £100. This means that if your mortgage repayment is £1,000, MPPI will cost you £50 a month.

Do I need it?

This depends on your circumstances and access to cash if things took a turn for the worse. If you are a home-owning singleton in your 30s with a steady job, it could be a good idea, says Harrison. “You have to think what you would do if your income suddenly dried up. But bear in mind that it is not a cheap insurance, you will still be stuck for the initial deferment period and payments will stop after a year – if you have savings, it’s best to use them first.”

For a childless couple living together one income may support the absence of the other’s and MPPI payments would be wasted, which is the same situation that applies to a family. “Look carefully at your own circumstances as well as other insurance options as MPPI could be an expensive and unnecessary security,” says Morris.

6. Income protection

What does it cover?

This is one such option. Income Protection, also known as Income Replacement and previously referred to as Permanent Health Insurance (PHI), covers your income if you are unable to work through ill health. It does not cover unemployment. Unlike MPPI, it will pay out until you either retire or can perform your original job again. In addition, terms and conditions of the policy cannot change from the day it is taken out.

How is it charged?

Your monthly premium will be set according to your specific circumstances using four key criteria of sex, age, health and job.

What are the exclusions?

As the policy is specifically underwritten there are no exclusions. Pre-existing conditions will simply be reflected in your premium.

Do I need it?

Morris recommends that single first-time buyers reliant just on their own income should look at income protection before MPPI. “If you are young and fit it is often cheaper,” he says, “and as long as your industry is relatively secure, you can self-insure on the unemployment side by putting the money in the bank.” If you are in a ‘shrinking industry,’ however, MPPI could be the best bet. Families and couples may be more likely to be able to cover the others’ costs should they be unable to work.

---

Tag this article :