If your own assets such as a house or car, you may be tempted to make the most of them by releasing some of their value in the form of a secured loan.
Offering such securities as collateral can make it easier to raise finance, whether you do this by taking out a loan secured against your car or by obtaining a further advance to your mortgage. However, whilst, this approach can help you access larger sums of money than might otherwise be possible, it is a risk. If for any reason you are no longer able to make repayments, you could be left without key possessions. You could even lose your family home (or, in the case of a defaulted bridging loan, you might actually lose two houses.)
So, what can you do to mitigate this risk? Here we look at the couple of options open to you:
Payment Protection Insurance (PPI)
This form of insurance is designed to cover you if your earning power is compromised and, as a result, your debts become problematic. Policies can be obtained from lenders and insurers and will usually include certain caveats that need to be born in mind. For example, the self employed are normally excluded and there are limits on the circumstances that will be covered if you need to stop working and neither back pain or stress fall within the scope of your standard PPI plan.
You will need to be in full-time permanent employment on taking out your insurance and you will not be eligible to claim for any conditions that pre-date your cover.
(You should be aware that PPI is always optional. In the past these products have been mis-sold, with consumers being left under the impression that they had no choice but to take out PPI alongside their line of credit, even if it was of no use to them. If this has happened to you, you can reclaim the cost of from the PPI provider).
Income Protection Insurance (IPI)
Not to be confused with PPI, income protection insurance has some important differences. Much like PPI it will payout if you are unable to work due to illness, disability or as the result of an accident (redundancy cover can also be added as an additional extra). However, unlike PPI, you’re able to set exactly when your policy would kick in after you’ve stopped working. The longer the span of time you set, the lower the premium you’ll get.
So, if for instance your employer will pay for 6 months worth of sick leave as part of your terms of employment, you can tailor your cover to reflect this and save money in the process.
Policies remain in place until the end of the term, which you might typically set as your retirement age. If you claim and then go back to work you still have your cover in place.
As you’d expect premiums are normally related to how much of a risk you present to the underwriter in terms of your health, lifestyle, gender and age. If these factors make a policy unaffordable there are budget options with capped payouts, as well as ‘age related’ policies where your occupation and other risk factors are not considered.
Mortgage Payment Protection Insurance (MPPI)
As the name suggests, this form of insurance is intended solely for the purpose of covering your mortgage repayments should you be unable to work. As with the above products, payments only start after a set period of you leaving employment (usually between 30-60 days) however, many providers will back date payments to the start of this period once it has elapsed.
Unlike the options listed above, MPPI will cover unemployment as standard, but you will not be able to claim on it for as much as the first six months of the plan, meaning you will need an alternate provision (such as savings or a redundancy package) during this time.
There will be a cap on how much you can receive monthly, so this may not be appropriate if your mortgage is especially large.