THE BOOM IN PERSONAL LENDING IS CONCERNING THE BANK OF ENGLAND.
The rate at which people are taking out loans, maximising store credit cards and signing up for car finance is worrying the Bank of England. With extraordinary growth in the pace of debt, officials are concerned that lenders are granting loans to households that can ill afford to repay them. A recent meeting of the Bank of England’s Financial Policy Committee warned that lending is growing rapidly, potentially posing a risk to the UK’s financial stability, and to households’ own financial wellbeing. A large number of loans, mortgages and contingent liabilities are not covered by insurance but they should be. Are all your borrowings covered?
MORTGAGES MAY BE UNCOVERED
Half of UK mortgage holders have no life insurance protection in place and only one fifth have critical illness cover, according to a 2016 study by Scottish Widows. These statistics are remarkable. Mortgages are generally people’s largest liability. If the main earner in a household dies, the surviving partner might find it impossible to keep making the mortgage repayments. That could mean having to sell the property to move into rented accommodation at a particularly difficult time.
OTHER LOANS AND CREDIT CARDS
If you have taken out a loan to buy a car or for some other purpose, it might be covered by payment protection insurance that would pay out if you were ill or lost your job. Check whether you have such cover and what it includes. If it is not your habit to clear credit card balances each month, then you should ask what will happen to any uncovered balance if you should become ill or die.
CONTINGENT LIABILITIES AND BUSINESS DEBTS
You should not forget any unseen liabilities that may occur. For example, what if you are a guarantor for a family member’s mortgage and they lose their job or their business fails? If you are self-employed, you will also need to remember to include provision for your business debts.
WHAT TYPE OF PROTECTION DO YOU REQUIRE?
The objective is to make sure that you don’t leave your partner and children (but possibly other family members) to deal with your debts if you should die suddenly or suffer from a life-threatening illness. The straightforward solution is simple ‘term insurance’. You can arrange cover for a particular period, the ‘term’, to coincide with when you expect the loan(s) to be fully repaid. Loans on which you pay the ‘interest only’ should be covered by level term insurance. But when the loan is being reduced by payments of interest and capital, you can use a decreasing term insurance, where the amount of cover reduces over the period of the loan. Term insurance cover for death is not necessarily expensive and you may be able to put cover in force without a medical examination. As an indication, for a 30 year-old person in good health, level term insurance for £200,000 cover for 15 years could cost around just £8 a month. The same cover could cost a 50 year old around £29 a month. You could add critical illness insurance, which would pay out on diagnosis of a specified critical illness including heart attack, stroke or most forms of cancer. The cost of adding cover of £100,000 would increase the premium to around £23 a month for a 30 year-old and it would be about £100 a month for a 50 year-old. The cost of this cover increases with age, so the sooner you are able to discuss your protection requirements with us the better. Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Think carefully before securing other debts against your home.