Do I need mortgage protection insurance?
What is mortgage protection insurance, what do the different products cover and what are the costs? We look across the board at mortgage and income protection and set out what you need to know to protect you, your family and your home.
Mortgage payment protection insurance (MPPI) and income protection are both designed to help you pay your bills and stay in your home if you are unable to work. Different types of policy will cover you for accident, illness and unemployment or in some cases all three, but the costs and terms vary enormously. Here we take you through everything you need to know to protect your family and your home.
What is mortgage protection?
- There are a number of different products that are sometimes loosely referred to as “mortgage protection,” which include mortgage payment protection insurance (MPPI) and income protection.
- Different types of policy are designed to cover your repayments or replace your income if you suffer an accident, illness or unemployment.
- Alongside these products that help cover your bills if you face a loss of income during your lifetime, there is life insurance, which could be used to pay off your mortgage if you were to die leaving a partner or children behind. See our full guide on life insurance for more detail.
What are the different types of mortgage protection?
- Income protection is designed to replace a proportion of your income should you be unable to work due to an accident or illness. You can also get policies that will cover you if you are made redundant, although this will cost more. Long-term income protection will cover you until you reach retirement, while cheaper shorter-term income protection (STIP) policies are cheaper and will only pay out for a set period of time.
- Mortgage payment protection insurance (MPPI) will cover your loan repayments for a set period of up to two years if you lose your job or have an accident or illness which leaves you unable to work.
- Critical illness cover pays out a lump sum if you develop one of a range of listed serious medical conditions. The conditions covered are very specific and normally include certain types and stages of cancer, strokes and heart attacks, but each policy is different. It may be sold alongside life insurance or separately.
Is mortgage protection compulsory?
No, none of these products are compulsory, but you should think carefully about how you would cope in each of the scenarios they cover if you don’t have insurance.
In some cases you may have cover through work or protection built into your employment contract, so dig that out and check there first before you sign up to any new policies.
Do I need income protection and how much does it cost?
Income protection is a useful safety net which gives you the peace of mind that comes with knowing your monthly income will be covered should you be unable to work through accident or ill-health (also known as accident and sickness insurance). Some policies will also cover you against redundancy for an extra cost, but not voluntary redundancy. The latter may be known as accident, sickness and unemployment cover if it is for all three eventualities.
Income protection will cover up to 65% of your gross salary. The payouts are less than your salary because you don’t have to pay tax on the insurance payments and you should also be able to claim state benefits that aren’t means-tested, such as Employment Support Allowance.
The amount you pay will depend upon your age, occupation, whether you smoke, your health, weight, family medical history and the range of conditions covered. It will also vary according to what proportion of your income you want to cover and when the payments kick in following a loss of earnings.
A healthy 30 year-old man or woman working as an administrator, for example, would pay £12.50 a month for basic accident and sickness cover on earnings of £1,000 per month.
To see how the costs compare with other mortgage protection products see the table below.
What else should I know before buying income protection?
Your policy will have an excess period and a minimum claim period (sometimes known as a wait period or a deferred period), which you add together to determine when you will receive your first payment. The total waiting period is normally up to a year, but it can be more. You should make sure that you time the start of the payments to coincide with the date at which your sick pay from your employer is due to end.
Before you take out an income protection policy speak to your employer to find out what protection is already in place through your contract as some firms are more generous than others. Find out how long your company will continue to pay your salary if you are ill. Some firms will actually pay for an income protection policy on their employees’ behalf as a staff benefit, so make sure you’re not buying cover that you don’t need.
You can buy short-term income protection (STIP) which is cheaper and will only cover you for a fixed period of a year or two. Meanwhile, long-term policies are designed to pay out until you return to work or reach retirement age.
As with all the different policies we describe in this guide, most insurers will exclude cover for pre-existing medical conditions and you won’t get a payout for unemployment if you knew that your job was at risk of redundancy when you took out the policy. It’s vital that you are honest with the insurer during the application process as any inaccuracies can make your policy void.
Should I buy income protection insurance with my mortgage?
If you are buying income protection from your mortgage broker, make sure that he or she is not tied to one particular insurer and will compare quotes from across the market, otherwise you may get a very poor deal. If you buy it from your lender it will almost certainly be a tie-up with a single insurer, and therefore not value for money. By all means get a quote, but shop around to ensure you have the best deal.
Can l buy income protection if I’m self-employed?
Yes. Self-employed people are one of the key groups that this type of insurance can help because they don’t have any of the workplace protection that most employees enjoy. The insurer will want to look at your earnings history to determine what kind of cover you can get.
What is MPPI and is it the same as PPI?
MPPI – or mortgage payment protection insurance – is a useful product and slightly cheaper alternative to income protection. It should not be tarred with the same brush as PPI, which has been the biggest mis-selling scandal of our time.
While regulators have uncovered a few issues with certain MPPI providers over the years, the same could be said of most financial products, and this type of insurance can play an important role in securing your/your family’s financial future should the unexpected happen.
Because it is cheaper than income protection, MPPI is not as extensive in the cover it provides, so make sure that you check the exclusions carefully or use an independent broker to do the legwork for you. The main difference is that MPPI only covers your mortgage payments while income protection replaces most of your earnings.
MPPI will only pay out for a set period determined in your policy (normally up to two years) whereas long-term income protection can pay out for longer periods. As with income protection, you can choose between cover for accident and sickness only and cover for unemployment.
Should I get critical illness cover?
You should consider buying critical illness cover to help you to pay off your mortgage if you are diagnosed with a serious condition that leaves you unable to work. Rather than covering your income, critical illness insurance is designed to pay out a tax-free lump sum if you are diagnosed with one of the illnesses listed on the policy. There are normally around 30-40 and they will usually include strokes, heart attacks and certain types and stages of cancer. But don’t just assume that you’ll be covered if you get cancer or another serious illness. Every policy is different and certain early-stage treatable cancers may be excluded.
Like life insurance, you can choose between level term cover, which is more expensive because the payout remains the same over time; or decreasing term cover if you have a repayment mortgage, because the outstanding balance that you would need to clear is reducing over time.
You can buy critical illness cover as an add-on to life insurance or separately. If you can’t afford to cover your full mortgage balance it is still worth getting a policy with a lower payout as it will be better than nothing should you need it.
As with all health-related insurances, pre-existing conditions will not be covered.
What is family income benefit and do I need it?
Family income benefit is a type of life insurance which pays out a regular tax-free income instead of a lump sum upon the death of the policyholder.
You can choose a term of policy to suit your family’s circumstances, for example if you want to make sure that your family can stay in their home until your youngest child reaches adulthood you can set the timeframe accordingly.
How much is mortgage protection and income protection insurance?
The table below shows example quotes for the monthly premiums that a 30 year-old man or woman working as an administrator would pay to cover various different mortgage amounts. It shows roughly how the cost of income protection compares with MPPI and how adding cover for unemployment will increase your premiums.
|Monthly mortgage payments||Accident and sickness only||Accident, sickness and unemployment||Accident and sickness only||Accident, sickness and unemployment|
Source: Assured Futures. Quotes are accurate as at 16 February 2018.
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