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  • affects 1 in 4 women / 1 in 5 men before retirement
  • 94.1% of the critical illness claims are paid
  • protect yourself and your family if you get seriously ill
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Insurers: Aviva, Legal & General, Liverpool Victoria, Scottish Widows, Vitality, Zurich

Loan alert! How critical illness cover works with mortgage repayment

Do you have a mortgage? Chances are, you have already taken out a mortgage life insurance policy, as this is required by lenders before they will grant you your loan. Lenders view the life insurance policy as a kind of protection so that in case of the borrower’s death, the loan can still be paid.

Currently, though, lenders are also looking into adding critical illness insurance to strengthen the level of protection they have on the loan they have provided. This will also protect the lender in case you are diagnosed with a serious illness and cannot be able to pay for the mortgage.

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You see, with today’s medical advances, someone who gets critically ill will have a higher chance of surviving the illness or the attack. This can spell trouble if you only have life insurance coverage. This means that you need to pay for the loan in spite of your medical condition. In fact, indications show that only 3% of foreclosures are due to death while about 40% of families that lose their house to foreclosure is due to a family member (especially the breadwinner) becoming critically ill.

Having an insurance plan that covers both life insurance and critical illness means that if the borrower passes away or is diagnosed with a serious illness the insurance will kick in to cover the debt. Learn more in the article about combined life and critical illness insurance.

Usually, a repayment mortgage insurance package is designed so that as the loan is paid off, the level of insurance protection will also taper off. That means that you only get (and pay for) the insurance you need to cover the mortgage. This is for a repayment mortgage insurance plan. For an interest only mortgage, though, the insurance cover is designed in such a way that the cover remains level throughout.

Although this insurance coverage is primarily for the benefit of the lender, it can also provide you a certain level of protection. This can protect your family’s substantial investment in the home – you don’t need to be facing foreclosure just because you have become critically ill. With it, your family is safe and secure from the danger of losing your home. In case you are diagnosed with cancer or have a major stroke, the cover can help your family survive this particularly trying time.

Do you have to name the mortgage lender as the beneficiary of the critical illness policy?

It is not often that a critical illness cover is required by lenders. Usually, critical illness cover is added as a rider to a mortgage life insurance policy. When this life insurance policy is required by the lender, they will require that they be named the beneficiary.

You may also get an individual critical illness cover or an individual combined life and critical illness cover to ensure that you provide for the family’s monthly expenses, including monthly mortgage payments.

Here is a comparison of the two options with regards to beneficiaries:

Naming the lender as the beneficiary Getting individual critical illness cover
  • This may be required by a lender for the mortgage application to be processed.
  • This ensures that the mortgage is paid up when you are diagnosed with a critical illness.
  • Since this is issued under a “group basis”, premiums are cheaper.
  • Also, underwriting is not as stringent, again, because the policy is issued on a group basis.
  • You have control as to how the funds are spent.
  • You can continue with the monthly mortgage payments and use the rest of the funds for your treatment.
  • You may need the funds to help pay for your treatment. Even if you are able to pay up the mortgage, you may have to apply for a re-mortgage to get the funds for your treatment.
  • Premiums are more expensive since this is issued on an individual basis.
  • The money received may be diverted to other things, and once it is depleted, you may put the mortgage at risk.

You can find more information about how critical illness cover can protect a mortgage in the article Protecting Your Mortgage with Life Insurance and Critical Illness Insurance.

Last updated on: 18.1.2013

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