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What is Mortgage Protection?
Mortgage Protection Insurance can be a slightly confusing term because it can refer to both Life Insurance and Payment Protection Insurance in relation to a mortgage. In simple terms, the Life Insurance product protects in the event of the death of the policyholder, whilst the Payment Protection Insurance protects the monthly mortgage payments in the event that the policyholder is unable to work due to Accident, Sickness or Unemployment for up to 12 months.
Mortgage Protection Life Insurance
A Mortgage Protection Life Insurance policy provides a lump sum of money for family members to settle the outstanding mortgage balance in the event of the policyholder's death during the term of the policy. It is also known as Mortgage Life Insurance, Mortgage Insurance, Term Assurance and Term Life Insurance .
What type of cover is required?
If the policy is to be used solely to cover a repayment mortgage, then a decreasing term life insurance product is usually the best choice, as the amount of money the policyholder has been insured for decreases in line with the value of the outstanding mortgage balance.
Conversely, a level term life insurance product is usually the best choice for an interest-only mortgage, where the value of the outstanding mortgage balance remains constant during the term of the policy.
How much cover is required?
The amount of cover required is always going to depend on an individual's circumstances. Essentially, you need to work out the financial impact to your family in the event of your death, and how much money they would need to survive.
Most leading Mortgage Protection Life Insurance policies include Terminal Illness Insurance at no extra cost. In the event that the policyholder is diagnosed with a terminal illness (defined as where life expectancy is less than 12 months), then the insurer will agree to pay the amount of money insured on diagnosis rather than death. However, this benefit is not available during the last 18 months of the mortgage protection insurance policy.
Further cover can be provided with Critical Illness Insurance , which pays out the amount of money insured should the policyholder be diagnosed with having one of the specified Critical Illnesses. Not all companies have the same Critical Illnesses, so it is important that the policyholder is familiar with the inclusions and exclusions before any documentation is signed.
Mortgage Payment Protection Insurance
Mortgage Protection Payment Insurance provides a monthly sum to cover mortgage payments on the family home in the event that the policyholder is unable to work due to a sickness or unemployment for up to 12 months. As state benefits for people who are unable to work are limited, this form of insurance provides the most basic of cover for the most important of monthly payments.
Typically, Mortgage Payment Protection Insurance does not take in to account an applicant's occupation, gender or smoking habits when calculating premiums.
In the event of a claim, payments would start one month after the policyholder has been unable to work, and in most instances they would be paid directly to the mortgage company.
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