Mortgage Protection Insurance is a term used to encompass various types of cover designed to protect borrowers from events which could severely impact their ability to maintain mortgage payments. There are different variations, but when connected to a mortgage, they are all there to provide peace of mind and usually fall into the following categories:
Life cover generally falls into two types – ‘Whole of Life’ or ‘Term Assurance’. The whole of Life cover is guaranteed to pay out a lump sum on death, whenever it occurs. Term Assurance pays out if you die within a specified term of years. There are also different types of term assurance – for example, level, increasing, or convertible – but the type most commonly used as mortgage protection these days is Decreasing Term Assurance.
Linking to a repayment mortgage, and the sum assured reduces the same rate as the mortgage balance over the specified term. Because the insurer’s risk diminishes over time, the premiums are generally cheaper than the other life cover types. If the policyholder dies within the period, then the sum assured should be enough to pay off the outstanding mortgage balance and ensure the borrower’s dependents will not be left with a debt they might not otherwise be able to manage.
There’s an argument that says that life cover gets taken for the benefit of other people – i.e. your dependents – because sadly you won’t be around to see any service yourself. However, these days, thanks to improvements in medical treatment, many people now survive conditions that once might have been fatal. Nevertheless, whilst undergoing what may be long spells of treatment and recovery, it could have a marked effect on your ability to meet your financial commitments.
It is leading to the development of Critical Illness cover. That works similarly to Life Assurance, in that it has taken for a specific term of years. The cover can have different options such as level/increasing and so on. It got designed to pay out a lump sum and, like Life cover, for borrowers, it is typically taken on a decreasing term basis in line with the reduction of your mortgage balance. The key is that the benefit is paid if you fall victim to one of several specified critical illnesses, and pays out whatever the long term prognosis of that illness.
The type of illnesses covered vary from company to company but, in general terms, insurers usually cover between 40 – 50 specified conditions including cancer, heart attack, and stroke. Payouts depend on meeting the required level of seriousness of the particular situation suffered. The life companies all work to at least the pre-designated clinical definitions prescribed by the Association of British Insurers, which means that they can’t just arbitrarily decide that you’re not ill enough. Hopefully, if your treatment is successful, it means that not only have you survived, but you can benefit from your prudence by no longer having a mortgage to pay after your illness.
In practice, many companies will offer Life and Critical Illness Critical cover as a combined policy. They would usually payout on the first event, i.e. whatever happens first – either death or a severe illness – the payout gets made. They can also get written on a single or joint life basis.
Whereas Life and Critical Illness cover pay out a lump sum, “Income Protection” pays out a monthly sum designed to replace your wages in the event of you being unfit to work. Unlike Critical Illness cover, there are no restrictions on the illnesses or injuries covered, the only factor being whether they make you unsuitable to work. However, restrictions on how much you can cover and how quickly benefits would start to get paid. Additionally, the insurers want you to have an incentive to return to work rather than being better off on sick.
Typically, the most you can cover would be approximately 55%-65% of your income. Benefits would begin to get paid after a “deferred period” which would generally equate to the length of time you would receive sick pay from your employer. Benefits would continue to be paid for as long as you remain unfit to work or until the policy term ends, whichever comes first. However, to make premiums cheaper, most companies offer a “budget” option whereby benefits would get paid for a shorter period – usually between 2-5 years – to at least allow you to make alternative arrangements if it looks like you’ll get incapacitated for longer than that.
Like Life and Critical Illness cover, these policies are underwritten based on your health and lifestyle when you apply. All income protection policies get written on a single life basis.
Similar in many ways to Income Protection, these policies also cover you should you be made unemployed. Benefits are usually linked to your mortgage and other costs (rather than necessarily your wages) and would usually be paid one month “in arrears” after a successful claim. These policies get underwritten at the time of a claim, which can sometimes mean confusion/delay regarding whether a request would get met.
They are a useful safety net if you are made long term unemployed but be sure to check the details of how/when any unemployment benefits would get paid out, as it may be that you would have returned to work before any monies become due.
Probably the least common of the “mortgage protection” type policies but can often be valuable – particularly for those with young families. These plans can get taken to cover Life and/or Critical Illness get underwritten on the application in the same way as mentioned above.
However, unlike the traditional forms of policy, rather than pay out a lump sum, the cover would pay an annual or monthly income for the remainder of the plan’s term. Thus it can replace the primary breadwinner’s income for several years, dependent upon a particular client’s circumstances, which would get written on a level or basis, or an index-linked basis designed to keep up with inflation.
There’s an adage that says you can never have too much insurance. Indeed, many people have one or more of the different policy types, and it would be wrong to think of Mortgage Protection Insurance as just an “either/or” choice. However, affordability plays a massive part. Whilst it would be fantastic to cover yourself for every potential opportunity, a good Protection Specialist Advisor in Leeds will sit down with you and tailor the type of cover to be the most suitable combination to your family’s priority and budget.
If you take more than one type of policy; however, your Protection Specialist Advisor in Leeds would usually place all the cover with one provider. To help save you the additional policy administration charges that individual policies carry but get reduced when bringing all the policies under one plan.