In this brief guide, we are going to discuss the mortgage protection insurance and how it can help you secure your mortgage more.
What is mortgage protection insurance?
Mortgage payment protection insurance (MPPI) is a life insurance policy that covers the cost of your mortgage if you lose your job, become unwell or die prematurely. It is an income protection insurance.
The death benefits of the policy are therefore structured to go down in line with your mortgage balance. Most mortgage protection insurance policies will payout for a year, as the maximum.
£21,295 was the average value paid for income protection claims in 2017.
How does mortgage protection insurance work?
Mortgage protection insurance will pay you a certain amount each month if you make a successful claim. The amount they pay you may be enough to cover your monthly mortgage repayments or a proportion of your monthly mortgage repayments.
Most policies can cover your monthly repayments in full so long as they don’t exceed 65% of your gross annual salary and is available for both repayment (capital and interest) mortgages and interest-only mortgages. Some providers will cap their payouts at £1500 or £2000 a month.
In some cases, you can even get mortgage protection insurance which will cover 125% of your monthly mortgage repayments.
This means you can also cover the cost of any household bills too. The payouts you will receive will usually be for a year but you may be able to find policies which will payout for 2 years or even as little as 6 months.
Mortgage protection insurance will cover you for:
accident and sickness
accident, sickness and unemployment
You can choose a mixture of all 3 of one type but the type you choose will be dependent on your own personal circumstances.
What is the average cost of mortgage protection insurance?
The average cost of mortgage protection insurance will vary based on the size of your mortgage, your personal circumstances such as your medical record, your age, how much your monthly mortgage repayments are, the type of policy you want etc.
You can choose a policy that’s based on your mortgage amount or on your salary.
30 year old – £8.70 (lowest quote) £39.40 (highest quote) £19.27 (average quote)
40 year old – £15.25 (lowest quote) £42.66 (highest quote) £23.55 (average quote)
50 year old – £16.52 (lowest quote) £44.23 (highest quote) £24.14 (average quote)
Quotes gathered from moneysupermarket.com on 27 March 2018 using ‘accountant’ as the occupation; results based on quotes from 15 providers. Policies include a 60-day waiting period. Average UK salary sourced from the Office for National Statistics Family Spending 2017 survey. Average monthly mortgage payment sourced from December 2017 UK Finance Regulated Mortgage Survey.
Is mortgage protection insurance worth?
You may view mortgage protection insurance as being worth it as it covers your costs if you were to become unwell and unable to work or if you were to lose your job or die prematurely. This means you won’t risk having your home repossessed as your monthly mortgage repayments will be covered by the mortgage protection insurance.
What is the difference between mortgage protection and life insurance?
The main difference between mortgage protection and life insurance is that mortgage protection covers the costs of your mortgage should you die, fall ill or are unable to work.The cover amount reduces as your mortgage balance reduces.
Life insurance, on the other hand, will pay out a fixed amount if you die or become terminally ill. The cover amount remains the same throughout the term of the policy.
Is mortgage protection insurance mandatory?
Mortgage protection insurance is not mandatory but some mortgage lenders may require you to cover the costs of their mortgage insurance which protects them in case you default on your mortgage.
You may also not need mortgage protection insurance if you are already covered within your life or health insurance policy.
You should check with the companies who provide that policy before you make a decision.
If your employer pays a generous redundancy pay then you may also not need to take out a policy protecting your monthly mortgage repayments.
If you are eligible for certain government benefits which may be able to help you cover most of your mortgage costs such as the support for mortgage interest (SMI) then depending on your personal circumstances you may not need to take out another policy covering your monthly mortgage repayments.
Note: The Support for Mortgage Interest (SMI) benefits only pay the interest on your mortgage and depending on your circumstances there can be a delay of 39 weeks before the first payment is made. It is also a loan that you will need to pay back when you sell your home.
Is mortgage protection insurance PPI?
Mortgage protection insurance is in itself a form of payment protection insurance.
It covers your monthly mortgage repayments should you fall ill, become unemployed or die prematurely. If you were not given the correct information or told that it was part of your mortgage then you could have been mis-sold mortgage protection insurance.
Why may you need mortgage protection insurance?
You may need mortgage protection insurance as it gives you protection against one of the biggest expenses most of us have each month: our monthly mortgage repayments. Our monthly mortgage repayments take about 18% of our combined household income each month in the UK and if you are in London then this rises to 24% of our household income.
This means if you are unable to work then your monthly mortgage repayments will be a major concern for you as you won’t be able to continue to keep up on your monthly mortgage repayments and you may risk losing your home.
Mortgage protection insurance, therefore, makes it possible for you to be able to continue making your monthly mortgage repayments in case you or your partner lost their job, you became ill and unable to work or you died prematurely.
Most people who are self-employed will not be able to get redundancy pay and therefore mortgage protection insurance or mortgage payment protection insurance (MPPI) will be a big factor in providing you with the security that you won’t lose your home if you can’t find any work.
Can you claim on your mortgage protection insurance immediately after purchase?
No, as with most insurance policies you can’t claim on your mortgage protection insurance immediately after purchase as there is an exclusion period before you can make a claim. An exclusion period can be between 20 and 180 days.
This means you should ideally get your policy with good time rather than react to any event or change in circumstances.
The policy which covers you for unemployment will also have a much longer exclusion period before you can make a claim. This has been made to stop people from taking out insurance after they have been informed that they are going to be made redundant or people who are expecting to be redundant for whatever reason.
The policy will not immediately begin paying you after a redundancy either, there will be a minimum agreed period which you must wait from when you become redundant when you can begin receiving payouts from the policy, this is different to the exclusion period, it is known as the deferred period.
A deferred period could last between one and six months. There is some flexibility and you will have the option to determine how long the deferred period is. This means you can choose one which starts when your sick pay from your employer would come to an end.
You can also choose cover that will pay back the payments you made during the deferred period. This is called back to day one cover but is expensive.
How to lower the cost of your mortgage protection insurance policy
Comparing quotes from different providers is something we are very used to doing in the UK, when shopping for this policy it is very important that you compare from as many providers as possible so you can find a policy that suits your budget and needs.
Do an annual policy check-up
An annual policy check-up involves looking to see if you still need the cover, the same level or maybe a lower level of cover or if you should stop the policy altogether. If you still need the cover then comparing to ensure it is the cheapest policy you could possibly have is very important.
Don’t go over the top
Do you really need all that cover? Or maybe your potential redundancy pay, sick leave pay or savings may be enough to help you
Push back the pay outs
If you extend the deferred period, you may see it reflected positively in your premiums
Will you be classed based on your job?
Yes, most insurance providers will class you based on your job and this is the same here. We have provided a classification on how you may be categorised wit 4 being the riskiest.
Professionals; managers; administrative staff; staff with limited business mileage; admin clerks; computer programmers; secretaries.
Some workers with high business mileage; skilled manual workers; engineers; florists; shop assistants
Skilled manual workers and some semi-skilled workers; care workers; plumbers; teachers
Heavy manual workers and some unskilled workers; bartenders; construction workers; mechanics
In this brief guide, we discussed mortgage protection insurance. If you have any further comments or questions then please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.