Difference between income protection and mortgage protection?

I have recently taken out a mortgage and want to put some insurance in place to cover the loan in case I cannot work and make the repayments. What is the difference between mortgage protection and income insurance, which plan is best?

Question asked by Shahram Shirazi
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Answered by Andrew Jenkinson

Income Protection and Mortgage Protection explained

Although income protection and mortgage protection can seem like they cover the same risks there is a great deal of difference between the two plans, both in terms of the scope of cover and product quality.

Both plans are designed to payout a monthly benefit if you are unable to work due to illness or injury. With some plans it is also possible to add unemployment cover.

What is income protection?

Income Protection is traditionally a long-term type of cover protecting your income against the risk of lost income due to accident and sickness. It is usually possible to cover up to 65 per cent of your gross income all the way up until planned retirement (maximum policy term to age 70).

With some plans it is now possible to limit the amount of time the plan can payout for to 1, 2 or 5 years. Some plans also allow you include up to 12 months of redundancy protection.

What is mortgage insurance?

Mortgage Protection plans are usually short-term payment protection policies providing up to 12 months worth of cover against the risk of lost income due to accident, sickness or unemployment.

These plans are designed specifically to cover your mortgage repayments and the maximum amount of cover is usually 125 per cent of your monthly repayment. This policy is often referred to as mortgage payment protection.

Income protection or mortgage protection?

A very common question is which type of policy is better. Although the answer to this question will depend on your specific situation, income protection is usually a far better plan in terms of product quality (including payout rates).

The main advantages of income protection over mortgage protection are as follows: long-term payouts; guaranteed/fixed monthly premiums; ‘own occupation’ rather than ‘suited occupation’ definition of incapacity; and greater protection for back, neck, chronic and mental health conditions (for which payment protection plans can be very poor).

When looking to protect a mortgage loan another important type of plan to consider is mortgage life assurance including critical illness cover.

income protection
payment protection
This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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