Insurance and Protection - An Integral Part of any Million Plus Mortgage Conversation

You’ve just had your extremely generous offer accepted on the super-prime property of your dreams and your mortgage has been approved. Your trusted mortgage broker then tries to have that conversation with you about insurance and protection, but your mind is focused on securing that dream property and the conversation goes on the backburner.

It can be considered uncomfortable to talk about these products as it usually involves considering ‘worst case’ scenarios, distracting you from the thoughts of completing your real estate transaction. But of course, buying a property is one of those life changing events which significantly affects your circumstances, both today and tomorrow, so reviewing your insurance and protection needs at this time is, therefore, from every angle and perspective essential.

Let’s say you buy a £20m property with a repayment mortgage of £12 million, at a broker negotiated rate of 5%. Based on a 25-year term, your repayments would be just over £70,000 per month, that’s not to mention bills and upkeep for the property as well as generous living expenses such as food, school fees and so forth. If you were suddenly unable to work due to incapacity, or made redundant, how would you cover these payments and expenses? Perhaps you have a partner who is the primary carer for your family. What if they suddenly became unwell? You might need to take time off work to support them unexpectedly, and as a result, your income may also be affected or at risk. The consequences of these life changing events can affect the financial status of even those with a high net wealth status. 

Only 7% of the UK population have income protection or critical illness cover. Part of the reason so many of us aren’t adequately protected is because of a lack of education and understanding around these products. There are four main types of insurance high-net-worth individuals should consider when taking out a mortgage, not all of these are a legal requirement, but they’re all worth considering. We explain these in more detail below.

 

High-Value Home Insurance

 

Home insurance will cover the rebuild costs and the cost of your possessions should something happen to your home. Your mortgage provider will expect you to take buildings insurance as a minimum as this is legally mandated, but if you’re in the prime or super-prime bracket, a standard home insurance policy simply won’t do.

Standard home insurance policies have a maximum total contents limit, typically between £50,000-£100,000, and for buildings insurance this is usually around the £750,000 mark. Both the rebuild value, and the contents value of a property in the £millions will be significantly higher than that of a standard property, so consider a high-net-worth home insurance policy that offers much higher limits and a multitude of other benefits.

These policies work on an all-risks basis and the advantage of this is much wider cover. Unlike a standard policy, which covers only stated perils or risks, a high-net-worth home insurance policy covers a broad range of risks such as theft, fire, water, and accidental damage, unless they’re specifically excluded in the policy terms and conditions.

Most high-net-worth policies also provide cover on a worldwide basis, which means your personal possessions are covered wherever you are in the world. This is especially beneficial for people with multiple homes or those who travel a lot for business. The policy can also be personalised if you need protection against specific risks which are unique to your circumstances, or liability cover against claims for personal injury or property damage. This type of policy offers a more comprehensive cover to meet the specific demands of your lifestyle, but with less restrictive terms.

By working with your insurance broker directly you can ensure this policy is in place from day one, i.e. from the day you exchange contracts. This is when the common law dictates the risk of damage or destruction passes to the buyer, not from the completion date as many assume. There are a few unfortunate examples when insurance was not in place at this stage so ensuring this situation is avoided is essential.

 

Income Protection

 

Our income is one of our most valuable assets, yet it often gets overlooked and many regardless of wealth are often unable to maintain their living standards if they were to lose this, let alone their repayment obligations. Income protection will help cover your mortgage payments and bills if you’re unable to work due to incapacity for any reason such as accident or sickness. It is an extremely useful protection for those with no financial dependents and is also available to the self-employed via an executive income protection policy.

This type of policy pays a percentage of the income earned in the 12 months prior to claiming and will ensure you can continue to meet your financial commitments.

 

Critical Illness Cover

 

Critical illness cover will pay a lump sum in the event of the diagnosis of a critical illness. The lump sum can be used to pay down mortgage debts, for the provision of medical care or even for modifications to a home. It ensures that savings and assets are not relied upon at an already difficult time.

High-net-worth individuals often have substantial assets and financial responsibilities and often have less traditional income streams which income protection would not cater to. Critical illness cover is the appropriate protection against sickness or disability to protect your wealth and ensure your assets remain untouched during a time when you wish to focus on your health and recovery. This can also be provided via a business to ensure your company runs smoothly in your absence.

 

Life Insurance

 

A life insurance policy will pay a lump sum in the event of death. The most common reasons for taking life insurance include protecting against your mortgage, providing security, care and support for your family, or replacing lost income. It’s pertinent to consider how your loved ones would cover the mortgage if you die before it’s paid off.

There are many reasons why even the wealthiest individuals should consider life insurance. If you have dependents, it can help ensure their financial security in the event of your death. Life insurance can also help pay any estate taxes that may be due if you have a large estate. And yet, a third of UK parents don’t have any form of life insurance cover.  Shocking when you consider that a parent dies every 22 minutes leaving a dependent child behind, according to the Child Bereavement Network.

There are a few different types of life insurance available. Term life insurance – the most common type - provides coverage for a set period, typically 10, 20, or 30 years whereas whole of life insurance offers lifelong coverage Universal life insurance also has both a death benefit and a cash value component, however, its policyholders have the flexibility to tailor and adjust their coverage in response to life events or changing finances. The cash value of the policy provides an opportunity for wealth accumulation within the policy, serving as a useful savings and investment vehicle and is a great way to begin diversifying your portfolio into a safer option Additionally, a universal life insurance policy includes the option for a policy loan, which is tax-free and does not require any credit checks. Typically, interest rates are lower than other secured lending options too.

It’s important to remember, that whether you’re the main earner or not, you still need to consider what would happen to your family if the unexpected happened. In the event of your death or that of your partner, a long-term illness, or other unforeseen circumstances, protecting your income and assets provides a cushion for your family to navigate a very difficult time. Often the high-net-worth can consider themselves immune to the effects of such life events, but arguably maintaining wealth and living standards is even more important.

Of course, there are other insurance and protection policies that you may need to consider throughout the course of your lifetime, and we can’t possibly cover them all here, but using a trusted financial adviser can help you to make informed choices about protecting your income and assets. Choose one who has experience of dealing with high-net-worth individuals or those with complex income structures, and who can help you work towards securing a better long-term future for you and your family.

Linked to this is the consideration of succession planning, which we covered in great detail in our recent article.

Unforeseen circumstances sadly can and do happen, and whilst it might seem like a taboo subject, everyone should be aware of the benefits of having adequate cover. So, next time your mortgage broker tries to have ‘that’ conversation, it is definitely worth a listen.

To discuss insurance and protection for high-net-worth individuals, contact Victoria Barton, Head of Insurance at [email protected].