Your own understanding of the term mortgage protection insurance may mean something different to you than it does to someone else. That is because there are two types of insurance designed to protect your mortgage repayments – one short term and one long term.
The short term policy is called MPPI (mortgage payment protection insurance) and is designed to cover your mortgage repayments in the short term should you lose your income due to accidental injury, prolonged sickness or forced redundancy.
The long term cover is called mortgage life insurance, and this ensures that should you die before you have finished paying off your mortgage, that the outstanding balance will be cleared. This ensures that your loved ones keep the family home without having to worry about how they will cope without your income.
Many people will purchase both types of cover in order to wholly protect their home in the event that disaster strikes. In fact, consumer organisation Which? suggests that having both income protection (MPPI) and life insurance is “must-have insurance for most working adults”.
While this may seem a bit morbid, using this tool gives you a fact based calculation of your risk of dying during your mortgage term. This may help you decide just how important protecting your mortgage (and the roof over your family’s head) may be to you.
In the meantime, here is a brief overview of how the products work.
Mortgage payment protection insurance will typically pay you a tax free cash sum every month for up to 12-24 months (depending on the provider) in the event that you lose your income due to prolonged illness, accidental injury or involuntary redundancy.
Sometimes referred to ASU insurance (which stands for accident, sickness and unemployment), the policy is designed to help you meet your mortgage repayments while you recuperate or find another job.
The amount you will receive will be agreed before you sign the paperwork, but for MPPI you can usually cover up 125% of the monthly repayment, and with ASU you insure a fixed amount but it cannot exceed 60-75% of your gross income.
Mortgage life insurance
This type of life insurance for mortgages is designed to pay off the outstanding balance on your home loan should you die within the policy term. There are two options:
Decreasing term life insurance
This is used when you have a repayment mortgage. The amount of cover reduces in time alongside the mortgage balance. This means you have a cost effective way of insuring that, should you die before your home loan is paid off, the balance will be cleared.
Joint life insurance is available, so if you or your partner dies before the mortgage has been cleared, the policy will pay out.
Level term life insurance
This policy is designed for people who have an interest-only mortgage but is sometimes suitable for those with a repayment mortgage too if you wish to leave a lump sum for your family in the event of your death.
With this type of mortgage life insurance, the sum insured (i.e. the amount that will be paid out in the event of your or, in the case of a joint policy, your partner’s death) remains the same.
With mortgage life insurance, critical illness cover can also be added on, so that in the event of a serious illness, the policy will pay out.
In summary, there are several options that enable you to protect the repayment of your mortgage – and keep the roof over your family’s head – should the unexpected happen. Seeking the advice of a specialist may demonstrate how cost effective mortgage protection insurance can be.