Mortgage Protection Insurance Explained
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 that are all there to provide peace of mind when connected to a mortgage. They usually fall into the following categories:
- Life Cover
- Critical Illness Insurance
- Income Protection
- Family Income Benefit
As a rule, if the policyholder dies within the term, then the assured sum should be enough to pay off the outstanding mortgage balance. This, therefore, ensures the borrower’s dependents aren’t left with a debt they might not otherwise be able to manage.
Our advisors can run through all the different types of life cover and recommend the most suitable plan for you.
Critical Illness Insurance
Critical Illness Insurance works in a similar way to Life Assurance, in that it is usually for a specific term of years and can have different options such as level/increasing etc. It is 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, if you fall victim to one of a number of specified critical illnesses, the benefit will be paid. It also pays out whatever the long-term prognosis of that illness. From company to company, it varies what type of illnesses they cover. That’s why this type of insurance cannot be solely price-driven and advice is recommended.
In practice many companies will offer Life and Critical Illness Critical cover as a combined policy and would usually payout on the “first event” i.e. whatever happens first – either death or serious illness – the pay-out is made. They can also be 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 in order 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 is whether they make you unfit to work. There are however restrictions on how much you can cover and how quickly benefits would begin to be paid.
Like Life and Critical Illness cover, these policies are underwritten based on your health and lifestyle at the time you apply. All income protection policies are written on a single life basis.
Family Income Benefit
Probably the least common of the mortgage protection type policies but can often be valuable – particularly for those with young families. These plans can cover Life and/or Critical Illness and are underwritten on application in the same way as mentioned above.
However, rather than pay out a lump sum like the traditional forms of policy, the cover would pay an annual or monthly income for the remainder of the term of the plan. Thus, it can replace the income of the main breadwinner for a number of years. This is dependent upon a particular client’s circumstances. Because of this, it would usually be provided on a level or basis, or an index-linked basis, to keep up with inflation.
There’s an adage that says you can never have too much insurance. Certainly, many people have one or more of the different types of policy and it would be wrong to think of Mortgage Protection Insurance as just an “either/or” choice. However, in the real world, affordability plays a massive part. Therefore, whilst it would be fantastic to cover yourself for every potential opportunity, a good advisor will sit down with you and tailor the type of cover to be the most suitable combination to your family’s priority and budget.
This is where we can help!
Please give us a call or fill out our enquiry form to speak with one of our Dedicated Protection Specialists.