Top home insurance tips for first-time buyers
Taking that first step onto the property ladder can be pretty daunting. With lenders now demanding borrowers jump through all kinds of hoops to secure a mortgage, first-time buyers could be forgiven for devoting all their energy to the task of simply getting a loan.
But there's plenty of other paperwork to occupy new homeowners and much of it is related to insurance. As soon as you become an owner rather than a renter, everyone from your bank to your utility providers will begin offering you "vital" policies.
Sorting out the necessary from the not-so-necessary can seem like a chore, but it's worth remembering that while a landlord will no longer be taking a share of your hard-earned cash, they'll also no longer be fixing the broken boiler.
Bricks and mortar
For most homeowners, buildings insurance won't be optional - anyone with a mortgage will be required to have insurance that covers the building.
However, you don't usually have to purchase it through your lender, so shop around to get the best deal. You must have insurance in place when you exchange contracts on a property, so this should be a priority.
Buildings insurance only covers your property, so you'll also need contents insurance for your possessions. This is usually taken out in conjunction with buildings cover, but you can also take out a standalone policy.
Do a detailed inventory to work out how much cover to get - many people underestimate their needs. If you are underinsured, your insurer is likely to reduce the value of any claim.
Life's little emergencies
The idea of being without heating strikes terror into the heart of many people, particularly given our recent winters. Some homeowners take out insurance to cover boiler breakdowns, and there are also policies for central heating systems, plumbing and drainage.
The cheapest way to get cover is often through home emergency cover, which is usually offered as an add-on by buildings insurers and covers things such as plumbing and heating breakdowns or power failure.
However, the maximum payout is quite low when compared with more comprehensive standalone policies.
Many people choose to take out separate boiler cover, but the need for this is debatable. Research by consumer body Which? found that 90% of households would be financially better off doing without a contract and simply paying for repairs as they arise.
Blane Judd, chief executive of the Chartered Institute of Plumbing and Heating Engineering, says buyers should consider the age of their boiler and if it's still under warranty when deciding whether to take out cover.
The age of your property will also be a factor when deciding whether you need drainage, electrical or plumbing cover. "If it's a new property and is still covered by certain guarantees, it may not be worth having all the insurance," says Paul Lawler, spokesperson for moneysupermarket.com.
The other big issue to consider when taking on a 25-year mortgage is what would happen if you became sick, sustained an injury or died.
If you have a repayment mortgage, you can get cheaper, decreasing term life insurance, as the amount to be repaid will fall over time. If you have an interest-only loan, you'll need a level term plan.
In addition, find out if your employer offers a death-in-service benefit. These typically pay set multiples of your salary if you die while employed by the company, which may cover your outstanding mortgage.
Ray Black, independent financial adviser and founder of Money Minder, says if you have a large mortgage you should also consider products that cover illness or injury.
"Critical illness insurance to pay off the debt if you suffer a critical illness and income protection if you're unable to work due to illness or injury are just as important, or potentially more important, than life insurance."
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
Term assurance provides cover for a fixed term with the sum assured payable only on death. Term assurance premiums are based primarily on the age and health of the life assured, the sum assured and the policy term. The older the life assured or the longer the policy term, the higher the premium will generally be. There are generally two types of term assurance. Level term assurance premiums are fixed for the duration of the insurance term and a payment will only be made if a death occurs during the insurance period and with decreasing term assurance, life cover decreases during the insurance term reducing the cash payout the longer the term runs and this is reflected in the premium.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.
This type of insurance covers the structure and fabric of your property – the bricks and mortar, not the contents (for which you need contents or home insurance). If you have a mortgage, the lender will insist you have a suitable buildings insurance policy in place. Many lenders offer their own building insurance policies, but you don’t have to buy it from your own lender but you have the option of shopping around. The insurance covers you for the rebuilding costs, not the market value of the property.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.