Mortgage protection insurance is often misunderstood. This article will break everything down and explain mortgage protection cover. You’ll then be in a stronger position to decide if it’s an option that might be of benefit to you.
What is mortgage protection insurance?
Mortgage protection insurance is very similar to a decreasing-term life insurance policy.
The only difference is that the term is set for the life of your mortgage and the benefit payable decreases in line with the amount you owe.
So as the years progress and you pay off your mortgage, the amount of cover provided by the policy also decreases.
An alternative would be to take out a decreasing-term life insurance policy and arrange it to match your expected mortgage amount owed. Having a specific policy linked to your mortgage can be a lot simpler.
Who needs it?
Mortgage protection insurance is most useful for those with a substantial mortgage. It’s even more important if you have a partner or children.
Having mortgage protection cover means that if the worst was to happen, your family can keep a roof over their heads. Otherwise, they could be left struggling to keep up payments with a reduced household income.
Having cover ensures a surviving partner or children would not have to bear this huge debt burden.
You may already have a life insurance policy that would pay a lump sum that could be used to cover the mortgage. This would potentially leave nothing else for your family.
Having mortgage protection insurance to cover the house and then a separate life insurance policy to help your family survive and build wealth would be the ideal situation.
What about government support?
Support from the state wouldn’t cover your mortgage, unfortunately.
Currently, the UK government offers a Bereavement Support Payment (BSP). This can be helpful in the short term for meeting payments, but it only lasts for a maximum of 18 months.
Although your family may receive some assistance, they’ll still face the looming problem of the mortgage sooner or later.
How much does mortgage protection insurance cost?
The cost of mortgage protection cover will vary based on your circumstances.
The main considerations are:
- The amount left payable on your mortgage
- How many years you need the policy for
Other things that may be taken into account include your:
- Lifestyle and habits (including smoking)
Term policies like these are good value and reasonably priced. Having adequate insurance protection doesn’t necessarily have to mean breaking the bank.
How does it differ from other types of insurance?
Mortgage protection insurance is different from mortgage payment protection insurance (MPPI).
MPPI is a short-term policy with a limited number of monthly payments. Whereas mortgage protection insurance is a lump-sum payment to cover the whole remainder of the mortgage.
Income protection insurance (IPI) also pays a monthly benefit. You can use it to keep up mortgage payments, but only if you stop working due to illness or disability. Death would mean IPI payments would stop or not even begin.
Some insurers will let you add critical illness cover to your mortgage protection insurance policy. This way you’d also receive a lump sum to help pay off the mortgage if you became ill.
Other types of insurance may cover mortgage payments for a while if you were to become sick. But if you were to die, these policies wouldn’t be much use.
Mortgage protection insurance works in a similar way to life insurance. It’s an affordable form of protection to cover an outstanding mortgage.
You may already have a life insurance policy that takes the mortgage into account, so it’s worth checking your current cover.
Adequate insurance means protecting your home and preventing your family from shouldering a large debt burden.
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