When taking on a mortgage, one of the most significant financial commitments you may ever make, it’s natural to want to ensure that your home and loved ones are protected, even in times of unexpected hardship. This is where mortgage protection insurance can play a valuable role. In this comprehensive guide, we explain what mortgage protection insurance is, how it works, the different types available, and which considerations are important when deciding whether it’s suitable for your individual needs.
What Is Mortgage Protection Insurance?
Mortgage protection insurance (often referred to as MPI) is a type of insurance policy designed to help cover your monthly mortgage repayments if you’re unable to work due to illness, injury, or in some cases, redundancy. Depending on the policy, it can provide financial support for a specified period, ensuring that your mortgage is serviced during challenging times, reducing the risk of falling into arrears or facing repossession.
Why Consider Mortgage Protection Insurance?
For many homeowners, the thought of not being able to keep up with mortgage payments due to unforeseen circumstances can cause genuine worry. Mortgage protection insurance can offer peace of mind by allowing you to maintain mortgage commitments through temporary periods of vulnerability. It can be especially helpful if:
- You do not have other financial safety nets such as substantial savings or employer sick pay beyond the statutory level.
- You’re self-employed and would be without income if unable to work.
- You want additional reassurance that your home can be retained in the event of redundancy or long-term illness.
It’s worth noting that policies vary and not all provide cover for redundancy; some focus solely on accident and sickness.
Types of Mortgage Protection Insurance
There isn’t a single type of mortgage protection insurance. Various options exist, and understanding the differences can help you make an informed decision. The most common forms of MPI include:
1. Accident, Sickness and Unemployment (ASU) Cover
This type of insurance covers your mortgage repayments if you are unable to work due to accident, illness, or involuntary redundancy. It typically pays out a monthly sum for a set period – often up to 12 or 24 months – depending on the terms of the policy. ASU policies commonly include a waiting period (sometimes called a deferment period), which is the time between making a claim and the payments starting.
2. Accident and Sickness Only
Some policies focus solely on providing cover for accident or sickness, without the redundancy element. This could be suitable for those who are self-employed or not eligible for redundancy payments. These policies are generally more affordable than those which include unemployment cover.
3. Unemployment Only
If illness or injury is less of a concern but you want protection against the possibility of job loss, this type of policy may be beneficial. However, it’s important to understand that not all job losses qualify — voluntary resignation or dismissal for misconduct would not be covered.
4. Income Protection Insurance
Different from MPI, income protection is broader in scope and isn’t tied specifically to your mortgage. Instead, it provides a percentage of your income (often around 50%-70%) if you’re unable to work due to illness or injury. This allows you to use the funds as needed, which could include covering your mortgage along with other living expenses. This type of cover may provide longer-term support than traditional MPI policies.
5. Critical Illness Cover
Critical illness cover pays out a lump sum if you are diagnosed with a specified serious illness (such as cancer, heart attack or stroke). This lump sum can then be used to pay off your mortgage or help with repayments. It’s not the same as a regular MPI policy, but some individuals choose to secure critical illness cover as a way of ensuring mortgage protection during life-changing health events.
How Does Mortgage Protection Insurance Work?
Mortgage protection insurance policies typically work by paying out a fixed monthly amount, sometimes matched precisely to your mortgage repayment amount or a slightly higher figure. This payout is made during a defined claim period and begins following a waiting period – this could range from 30 to 90 days depending on the policy.
For example, if your mortgage repayment is £900 per month and your policy covers that amount, the insurer would make a monthly payment of £900 to help meet your mortgage obligations while you’re unable to work. The length of payout varies by provider, but most policies are designed to provide payments for up to 12 months, though some policies may pay for longer.
Eligibility Criteria for Mortgage Protection Insurance
To qualify for a mortgage protection insurance policy, most insurers will require you to meet certain eligibility conditions. These may include:
- Being aged between 18 and 65 (though age limits may vary by policy)
- Being employed or self-employed at the time of application
- Residing in the UK and having a UK mortgage
- Working a minimum number of hours per week (commonly 16 or more)
Insurers may also conduct health and lifestyle assessments. Some policies are more lenient than others regarding pre-existing conditions, so it’s important to read terms carefully or speak to an adviser to help you navigate the policy options.
What’s Typically Covered?
Every insurance provider is different, but most mortgage protection insurance policies will provide cover for:
- Accidents and injuries that prevent you from working
- Short or long-term illnesses that stop you from carrying out your job
- Involuntary redundancy (if included in the policy)
Make sure to review your policy documents to confirm any exclusions or limitations. For instance, certain mental health conditions or back problems might have limited coverage or require additional medical evidence.
What’s Often Not Covered?
There are limitations and exclusions in most policies. Common exclusions may include:
- Pre-existing medical conditions not disclosed at the time of application
- Voluntary redundancy or resignation
- Dismissal due to misconduct
- Self-inflicted injuries
- Normal pregnancy and childbirth
Some policies may also have minimum and maximum payment thresholds, or only cover specific job types. It’s crucial to understand what is and isn’t included in the policy before committing.
Policy Term and Duration
Mortgage protection insurance is typically a short-term policy, with cover lasting for 12 or 24 months after a successful claim. It’s not designed for lifelong protection. Policyholders usually pay monthly premiums, and the cost can vary depending on several factors such as age, health, occupation, and level of cover selected.
Cost of Mortgage Protection Insurance
The monthly cost of MPI depends on different variables, including:
- Amount of cover required
- Your age and health status
- Employment type and industry
- Inclusion of redundancy protection
- The length of the benefit period and waiting period
Generally, the younger and healthier you are when you take out the policy, the lower the premium may be. Policies including redundancy cover usually cost more than those offering protection for accident and sickness alone.
Mortgage Life Insurance vs Mortgage Protection Insurance
It’s easy to confuse mortgage protection insurance with mortgage life insurance, but they serve different purposes:
- Mortgage protection insurance is a temporary policy that pays your monthly mortgage if you can’t work due to illness, injury, or redundancy.
- Mortgage life insurance (also known as decreasing term life insurance) pays a lump sum to your beneficiaries to help repay the mortgage in full if you pass away during the policy term.
Both insurances can be useful, depending on your personal and family circumstances. In many cases, people choose to hold both types to ensure comprehensive financial coverage.
When Might Mortgage Protection Be Less Suitable?
While MPI can help protect your mortgage repayments, it may not be suitable in all situations. For example, individuals with strong employer benefits such as extended sick pay or income protection as part of their employment package may find the additional cover unnecessary. Likewise, those with significant savings, or with more comprehensive income protection policies in place, might not need an MPI policy.
Additionally, self-employed individuals should be cautious about policies that exclude certain types of work or income structures. Always ensure the policy suits your employment situation before proceeding.
Alternatives to Mortgage Protection Insurance
Depending on your personal circumstances and financial goals, there are alternative types of protection that could serve a similar purpose or complement mortgage protection insurance:
- Income protection: Provides a monthly income regardless of whether you have a mortgage.
- Critical illness cover: Offers a lump sum payout if diagnosed with a covered serious illness.
- Life insurance: Pays out if you pass away during the policy term, assisting with mortgage repayment for dependents.
- Redundancy insurance: Specifically designed to cover income if made redundant, separate from mortgage payments.
How to Choose a Mortgage Protection Insurance Policy
There are several key factors to consider when selecting MPI, including:
- The waiting period before benefits commence
- The duration of benefit payments
- Whether cover is level or decreasing
- Exclusions and limitations in the policy wording
- Your occupation and working patterns
Rather than selecting a policy solely based on price, it’s usually more beneficial to consider the level of cover, the provider’s claim reputation, and how well the policy aligns with your needs.
Mortgage protection insurance can provide valuable support in helping to continue your mortgage repayments during times when you’re unable to work. However, it’s not a one-size-fits-all solution. The suitability of mortgage protection insurance depends on your employment status, existing financial protection, and individual circumstances. Understanding the policy conditions, what is and isn’t covered, and carefully reviewing your options can help ensure you make the right decision for your situation.
If you’re uncertain whether mortgage protection insurance could be appropriate, seeking tailored guidance may help you explore the available policies and providers relevant to your financial needs and personal objectives.