Mortgage protection insurance helps ensure you can make your monthly repayments, even if something unforeseen gets in the way of your income. But is it a suitable coverage option for you – or should you consider another insurance type? Read on for the details.
The reality is, defaulting on mortgage payments can lead to losing your home. Getting the right coverage can safeguard against this possibility.
So what is mortgage protection insurance? What does it cover? And how much can you expect to pay for it?
We’ll take you through it.
What is protection insurance for a mortgage?
Mortgage payment protection insurance (MPPI) is a type of income insurance specifically focused on covering your monthly mortgage repayments if you have an accident, fall severely ill, or your workplace no longer needs your services.
You can take out mortgage protection insurance whether you’re employed, a contract worker, or self-employed.
It’s not mandatory to take out MPPI when you get a mortgage, but it is a good way to help ensure that you’re able to make your repayments, even if something gets in the way of your income.
What type of insurance is most suitable for mortgage protection?
Different types of mortgage protection are available, depending on how much coverage you’re looking for.
You can opt for:
- Accident and illness. If you can’t work because you get sick or have an accident, this type of coverage will help you with your repayments.
- Unemployment. If you lose your job for a reason beyond your control, unemployment insurance will help you make your payments.
You can also get full mortgage coverage that will pay out regardless of whether you have an accident, fall ill, or are made redundant.
Some kinds of mortgage protection insurance will help you pay your other household bills. This means the provider will pay more than 100% of your mortgage if you can’t work. There are limits on how much a provider will pay monthly, typically in the region of £2,000.
It’s important to note that mortgage protection policies include an exclusion period, usually a month or two. After taking out a policy, you must wait for this period to pass before you can claim.
How much is mortgage protection insurance in the UK?
Monthly insurance premiums for mortgage protection usually sit in the region of £25 a month – but they can go quite a bit lower or higher. On the high end of the spectrum, you can pay about £50 a month; on the other end, you can go as low as £10.
The cost of mortgage protection depends on a few factors, including:
- How much coverage you need. Do you want your plan to include accident and illness, and unemployment, or just one or the other?
- How much your mortgage repayments are. The higher the repayments, the higher your insurance costs will be.
- Your timeline. How long you still have left on your mortgage term will affect the cost of your insurance.
- Your risk of injury. Working as an accountant, for example, will put you at less risk than working in mining.
You may also pay more to have a shorter wait period before your coverage kicks in.
It’s worth bearing in mind that there are ways to lower the cost of your MIIP. Consider:
- Your savings. How long could you pay your mortgage for (comfortably) on the savings you have?
- Your company’s sick pay scheme. Check to see what you’re entitled to if you can’t work because of an injury or severe illness. How long could it cover you before you would need mortgage payment protection to kick in? You might be able to reduce your premiums by increasing your exclusion period (the time it takes for your insurance to start paying out – more on this below).
- What you’re already covered for. Some life insurance policies include income protection. Before taking out MIIP, look to see what other existing policies cover.
How long does mortgage protection insurance last?
How long your insurance pays out will then depend on the policy you have. The insurance company may pay out for up to one or two years – or until you’re able to go back to work if this happens before your window is up.
As for when your mortgage protection insurance will start paying out, that also depends on your particular policy.
Your payments will begin once you’ve been out of work for a specified amount of time, usually between 30 and 60 days, but possibly as many as 180 days. This is called either the waiting, exclusion, or deferral period.
This means if you had an accident on 1 May, for example, and you have a 30-day exclusion period, you will have to wait until 31 May before your insurer will start paying out.
Some insurance companies offer “back-to-day-one” policies, where they will backdate the claim to the first day you were off work. However, you’ll still have to wait for the exclusion period to end before they start paying out.
What doesn’t mortgage payment protection insurance cover?
Before taking out an insurance policy, it’s crucial to find out precisely what it will and will not cover.
First up, self-employed people usually won’t be able to claim if they aren’t able to find work as this is seen as their responsibility rather than an employer’s.
If you’re employed, and you get fired or quit (rather than retrenched), MPPI is not likely to pay out.
Another important consideration is that you won’t be covered for pre-existing conditions. This can get complicated because you don’t go for a medical when you take out MPPI – only when you claim. The result is that you may only find out when you make a claim that a certain condition isn’t covered.
It’s vital that you read through your policy carefully and ask questions if you don’t understand anything.
Is mortgage life insurance the same as mortgage protection insurance?
While both types are mortgage insurance, there is a difference between mortgage protection insurance and mortgage life insurance:
- Mortgage protection insurance will pay your repayments if you’re unable to work.
- Mortgage life insurance will cover your mortgage payments if you pass away. A type of insurance called decreasing term life insurance is often used for this purpose. This kind of policy pays out less over time, making it ideal for a mortgage because the total also decreases over time.
There are other alternatives, too, including critical illness coverage and payment protection insurance.
- Critical illness coverage. Should you fall seriously ill or become disabled, critical illness coverage will provide you with a tax-free lump sum that can be used to cover whatever expenses you need it for. This can include your healthcare costs and monthly expenses, like your mortgage. It’s often an add-on to a life insurance policy.
It’s important to note that not all illnesses are covered under this type of policy and unlike income insurance, it won’t protect you if you lose your job.
- Payment protection insurance. You may have heard this referred to as PPI. PPI is also income insurance, but it works differently from MPPI. PPI helps you cover your debts for a short period of time should your income be affected by accident, injury, or unemployment.
Unlike MPPI, it also covers credit card debts and loans, as well as mortgages. Another key difference is that PPI makes payouts directly to the lender, while MPPI gives the money to you to pay your mortgage with.
It can be challenging to know what option to go for. Getting professional mortgage advice is a great place to start – Howden can help with that! – so that you can find the policy that’s right for you at this particular phase in your life.
Whatever option you choose, it’s always a good idea to have some savings tucked away to help you if you hit difficult times. Insurance protection can be a lifesaver, but having an extra buffer will help alleviate some of the stress.
Summary
Mortgage payment protection insurance (MIIP) is a type of income insurance that will help you make your mortgage repayments if you ever have an accident, fall severely ill, or are made redundant.
This will help protect you from losing your home if you’re ever without work for a period of time.
The cost of MIIP will vary depending on several factors, including how much cover you need, how much you earn, and what your mortgage repayments are.
Talk to an insurance specialist to find out if it’s the right option for you or if you should rather look at another type of coverage, like critical illness and/or payment protection insurance.
And remember to keep some savings to help you through any rough patches you might encounter.
Also read:
- Can I have more than one life insurance policy?
- When should you review life insurance?