8:38 AM, 13th January 2016, About 7 years ago
It is still very rare to meet a property investor who has sufficient life cover to protect the level of their property related debt. Even more surprising is that there are still a large number of people that haven’t even considered taking life cover for this purpose.
The need for life cover is something that all too often gets overlooked. While insuring a £500 state of the art mobile phone is essential, insuring the £50,000 a year earning individual holding the phone isn’t quite as trendy. In fact a great number of people will insure washing machines, irons, holidays, televisions and even their pets before they consider insuring themselves.
It doesn’t have to be complex it doesn’t have to be sophisticated it needs to be fit for purpose and give you that confidence to sleep at night knowing you’ve got things covered. The very reason you insure everything else!
So why is it that landlords who take the time to provide cover for their family and dependents, don’t give the same attention and consideration to their rental properties? Why, despite in many cases having large mortgages, does this vital part of the jigsaw go untouched?
The fact is that most people have very different ideas about what happens to their estate when they die. Many think that property held in sole name of a deceased landlord simply passes to another in name and that they take the mortgage over. That is absolutely and categorically not the case.
So, the first question that should be asked is “What would be the effect of my death on my portfolio”? How many can answer that?
• Would your mortgage lenders just transfer the mortgage to your beneficiaries? To be honest, probably not.
• Would there be enough equity in the properties for your beneficiaries to refinance them? Who knows? How can you know until you get there?
• Would the rental income be enough to satisfy the lenders criteria to refinance if interest rates increase? Again, who knows?
We asked a number of lenders, specifically in relation to Buy to Let Mortgages if they would ask for a BTL mortgage to be redeemed in the event of death of the borrower/landlord. The responses were as follows
• We would expect the mortgage debt to be repaid from either the cash funds held by the deceased’s estate or the sale of the property by the executor of the will
• If a sole borrower then technically we would require the account to be redeemed
• In the event of death of a borrower/landlord if the BTL is in sole name we would ask for the mortgage to be redeemed in full.
• It’s fair to say we would expect a sole mortgage to be redeemed.
If we asked most landlords why they got into property a great many would suggest that they wanted to be in control of their own destiny and use property to build up a nest egg they could use in retirement. That’s great if you get that far but sadly a great many don’t. Instead of that nest egg you planned to live on into retirement you are no longer around and that property is either passed to your surviving spouse or sold. It’s hardly what you had in mind when you purchased your first property is it?
That’s another point to consider. When you started on your plan to build your nest egg you no doubt thought that the nest egg would be for the good of everyone in the future. Good for you, for your spouse, for your children, in fact everyone would benefit when you retired. But. What if you don’t reach retirement? Does your spouse want to look after a property portfolio? Do your children want to give up their time to help your spouse manage rents, manage changeovers, emergencies, problem tenants, voids, maintenance and so on? In fact, would handing your family your property portfolio if you died tomorrow be possible? If nothing else, your average tenant will still demand hot water, light, electric and gas. Sadly there will be little sympathy if any for your spouse regardless of personal circumstances.
Ok. You could say that the rental income far outweighs the monthly interest payments and as such the “property will look after itself”. Rental > Interest does not = “Looks after itself”. Take away an experienced hands on knowledgeable full or even part time property manager (YOU) and who steps in? There isn’t necessarily a replacement.
Nobody is saying that protection is the panacea for all landlord/borrowers. It won’t manage your property, it won’t collect rents or conduct maintenance it won’t look after your tenants. It will however look after those loved ones and dependents you leave behind. In a time where anxiety and responsibility could be forced upon those most precious to you it can provide a cushion or buffer to enable them to come to terms with a new normal.
Protect your mortgage debt with life insurance. This means your beneficiaries can potentially inherit a mortgage free property. Give them some options and flexibility to make considered decisions. Give them some control. They can keep the property going but employ someone more experienced more hands on and more focused to manage any transition. They can still sell the property but at a time they decide is best and convenient and not at a time dictated by a lender. They can of course also benefit from an income and they can decide at what level. You can leave behind a legacy, where the benefits of your plan are there for your loved ones in the future. Don’t leave them with a burden which inevitably leads to your plan never being fulfilled.
The simplest way of addressing all of that above is to put in place a flexible, tax efficient life insurance policy, probably in trust, to make sure that the right people receive the money with a minimum of fuss within the quickest time possible.
All too often people are afraid to speak up and ask a question so instead they assume. In this instance we find that a great many people make an assumption which is so very wrong it can potentially have a devastating effect on those left behind.
Speak to an adviser who can guide you through the options available. Get protection now that will serve you well into the future and give you peace of mind that your desire to provide for your family continues.