What does Mortgage Protection Insurance Cover?

There are two main types of mortgage insurance to consider when looking at protecting your mortgage. The first type is mortgage life insurance and the second type is mortgage payment protection insurance (MPPI).

What does mortgage payment protection cover?

Mortgage payment protection insurance (MPPI) is a type of payment protection designed specifically to cover mortgage loan repayments against the risk of having to take time off work as a result of accident, sickness or unemployment.

After your chosen deferred period (which is commonly set at 30 days) the plan would start paying out a monthly benefit so you can keep up with your loan repayments whilst off work. These policies usually have a maximum payout period of 12 consecutive months.

It is usually possible to cover just accident and sickness, just unemployment (forced redundancy), or all three risks together under the same plan. The maximum amount of cover with these plans is usually set at 125 per cent of your total monthly repayment.

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What is typically not covered?

  • Forced redundancy or dismissal for poor performance;
  • The natural end of seasonal or contract work;
  • Unemployment if you had prior knowledge of redundancy risk;
  • Pre-existing and chronic medical conditions;
  • Self-inflicted medical conditions;
  • Non-disclosure of material information upon application.

It is also worth reading: What does mortgage payment protection not cover?

What does mortgage life insurance cover?

Mortgage life insurance is the name given to the type of life insurance taken out to cover a mortgage loan. This type of policy is designed to payout a lump-sum upon death so the loan can be repaid. It is a popular form of protection with couples taking out a joint mortgage and for those with families to protect.

With this type of cover there are two important forms to choose from. The first form is decreasing term life insurance where the level of cover declines over time. Decreasing term plans are usually used to cover a capital/principal repayment mortgage as the amount of debt outstanding on the plan declines over time.

The second form of cover is level term life insurance where the amount of cover remains 'level' over the term of the policy. Level term plans are usually used to cover an interest-only mortgage loan as the amount of debt outstanding remains fixed over time.

What is not usually covered?
  • Terminal illness unless you are diagnosed with less than 12 months to live;
  • Critical illness unless you add this option to your plan;
  • Death as a result of self-inflicted injuries;
  • Non-disclosure of material information upon application.

What does critical illness insurance cover?

When taking out mortgage life cover it is possible to add critical illness cover to your life plan. With this policy addition your plan would also payout a lump-sum to repay your loan if you were to suffer a serious illness or injury listed in the policy terms.

It is common for critical illness plans to cover between 33 to 40 specific 'critical illness conditions'. Common conditions covered include the following: Heart attack; Stroke; Cancer; Alzheimer's disease; and Multiple Sclerosis.

What is typically not covered?

It is important to note that the insurer will assess the severity of your condition at claim stage. It is sometimes the case that minor forms of these conditions would not be covered, with the removal of a contained breast lump being a common example.

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Published by Andrew Jenkinson
Financial Services Authority