Mortgage Protection Insurance is designed to protect you and your family’s biggest purchase: your home.
It’s split into two distinct products:
Both types of Mortgage Protection Insurance can help ease financial stresses associated with mortgages for you and your loved ones, but they’re very different and designed to cover you in different circumstances.
So how do you know which one is right for you?
Mortgage Insurance covers you for a variety of risks, including:
The threat of missing mortgage payments and losing your home is a risk that’s too often overlooked. Fortunately, Mortgage Insurance can reduce this worry.
In the 3 months leading to January 2019, there were just over 2 million people not looking for work due to long-term illness. The chances of debilitating illness or injury are more common than many people think and so most people caught by surprise by a health problem find themselves without proper financial support during their recovery.
Despite average weekly earnings in 2017/18 being £513, the Employment support Allowance offers a starter or typical income of only £73.10 per week. This means that relying on ESA alone (although other benefits are available) if you’re not working will result in a shortfall of income and could lead to difficult financial decisions.
Mortgage Insurance is not compulsory, but it’s usually a good idea if you’re not sure how you’d cope with repaying your mortgage should you become ill, injured or even sadly passed away.
Independent Protection Expert
Similarly, the risk of death is often one that goes unconsidered and many bereaved families find themselves looking at additional hardship when it comes to keeping up with their finances.
While some families are able to rely on their savings to support themselves during this time, others may not have the luxury of doing so with as many as 2 out of 5 people having no more than £1,000 in cash savings.
While some people may be capable of using their savings to keep up with their mortgage payments, that is clearly not a viable option for everyone.
In the table below we’ve outlined the risk of death for a health male of three different ages over the life of a 25 year mortgage.
1 in 33
1 in 8
1 in 4
Mortgage Payment Protection Insurance covers your monthly loan repayments from the risk of accident, sickness and potentially unemployment (forced redundancy).
If you are unable to work for any of these reasons, this type of Mortgage Insurance will pay out a monthly benefit until you either return to work or reach the full benefit term of either 12 or 24 months.
It is possible to cover 100% of your monthly repayments plus potentially an additional 25% for other monthly home costs, such as council tax and utility bills, depending on your insurer.
Primarily, Mortgage Payment Protection policies will cover you if you are too injured or ill to work. Every insurer uses a specific definition of incapacity to define whether your injury or illness meets the requirements to receive your benefits.
Mortgage PPI policies typically use a Suited Occupation definition of incapacity. This means that you will only be able to claim your monthly benefits if your injury or illness is severe enough that you are unable to work in your own occupation as well as any other suited occupations that you may be qualified for.
Mortgage Payment Protection Insurance policies will not normally cover pre-existing conditions. Most insurers use moratorium underwriting with their policy, which means that health problems that you suffered from in the past are automatically excluded.
Compared to Own Occupation Cover, Suited Occupation Cover can have a substantial impact on your ability to claim your benefits.
With this definition of incapacity, your insurer may suggest that you change occupations to one you’re suited to if you are unable to work in your own occupation, and what defines a ‘suited’ occupation can be subjective.
Independent Protection Expert at Drewberry
Unemployment Insurance can be taken out on its own or added to a Mortgage PPI policy if you are looking for comprehensive cover. It will provide you with monthly benefits if you are made unemployed; however, not every instance of unemployment entitles you to a payout.
You can only claim Unemployment Cover if:
If you are still interested in this cover, it is important that you look carefully at how your insurance provider defines ’employment’. It may be difficult to claim on such policies, so it’s always worth reading the fine print.
Your deferred period – also known as an excess period or waiting period – is a length of time you need to wait while out of work before you are able to claim your Mortgage PPI benefits. These periods can range from the first day of absence to 60 days or more.
Having a longer deferred period can greatly reduce the cost of your policy, but it can also put you at risk of being without income if your savings are lacking. The best thing to do is find a balance that is appropriate for you, taking into account the financial resources you have available.
Mortgage Payment Protection policies are short-term cover, so they will only ever pay out for a maximum of 12 or 24 months. This could be problematic if you have a longer-term condition that keeps you off work for some time.
Income Protection insurance is often seen as a more comprehensive and reliable alternative to Mortgage PPI if you are looking to protect more than just your mortgage payments.
While Mortgage Payment Protection is tied to the cost of your monthly mortgage payments, Income Protection is tied to your monthly earnings and so your benefits equate to a percentage of your normal salary. This allows your benefits to go further and afford other essential costs while you are out of work, such as utilities or essential food shopping.
Covers up to 125% of your monthly mortgage payments
Can cover up to 70% of your gross (pre-tax) monthly salary
Pays out benefits for a maximum of 12 / 24 months
Can pay out benefits until you reach retirement age
Covers you only under ‘suited occupation’ or ‘any occupation’ definitions of incapacity
Can cover you under the ‘own occupation’ definition of incapacity
Premiums are either ‘reviewable’ or ‘age banded’
It is possible to fix the cost of your policy with ‘guaranteed premiums’
The choice between Income Protection and PPI will depend on your financial resources and what it is that you want to protect. If your priority is your mortgage payments and you have the appropriate financial resources to take care of the rest of your finances while you aren’t working, then Mortgage Payment Protection might be he option you’re looking for.
But if you are concerned about long-term illness or injury and don’t have enough savings to support yourself without regular income, Income Protection will likely be the better option for you.
The main advantages of Income Protection over mortgage protection are as follows:
Mortgage Life Insurance is similar to a standard Personal Life Insurance policy with the exception that your cover is tied to your mortgage loan. It is designed to pay out a lump sum that can repay your mortgage in full if you pass away.
Mortgage Life Cover is intended to cover the entire cost of your mortgage loan, so it will usually pay out a lump sum large enough to pay off what is left of the loan in one payment.
Being tied to your mortgage, it is also typical that the policy’s end date is set as close as possible to the expected day that you pay off your mortgage.
There are two specific types of Mortgage Life Cover that you will need to choose from when taking out your policy. The type of covers are designed for different types of mortgages and so act differently while you have them.
If you have a principal repayment mortgage loan, Decreasing Mortgage Life Cover is usually the most suitable option. With such a plan, the level of cover declines over time aligning with the amount outstanding on your loan, eventually reaching zero at the end of your policy when you have officially paid off you mortgage.
One thing to be aware of when purchasing decreasing cover, however, is the decrease rate of your Mortgage Life Cover. If your benefit’s decrease rate exceeds the rate of your mortgage loan decrease, you may find yourself lacking in cover.
If you have an interest-only mortgage a Level Term Insurance policy is usually the most suitable option. With this type of cover the level of protection remains fixed throughout the life of the plan to reflect the fact that you don’t have to repay the outstanding capital balance of the loan until the mortgage ends.
It’s usually the best option for those looking for a level of family protection over and above the mortgage loan, also, as the amount of cover doesn’t diminish over time.
If you hold a mortgage together with another person and both contribute to the payments, it makes sense to protect both halves of the mortgage. This can be done by purchasing a Joint Mortgage Life policy. Joint cover will pay out your agreed benefit if either partner passes away before your mortgage has been paid off.
Be aware that most Joint Mortgage Insurance policies are Joint Life First Event, which means they’ll pay out when the first partner passes away and will end immediately after. As such, it may not be an ideal Life Insurance option if the people covered would like to leave something to their children in addition to paying off their mortgage because the policy would be over after the first claim.
There is more than one option when it comes to premiums and how your policy is priced, which is something to look out for carefully.
Guaranteed Premiums are fixed at the start of your policy and won’t change unless you adjust your cover.
Reviewable Premiums on the other hand are assessed regularly and adjusted according to what the insurer deems an appropriate price depending on how circumstances have changed in the wider world.
Depending on your personal circumstances, one premium type is likely to be better suited for you.
Guaranteed Premiums usually start out more expensive but are the more reliable option if you intend to have your policy for a long time and could work out cheaper over the life of the loan. Reviewable Premiums are usually cheaper at the start, but they can see unexpected price hikes and don’t typically have predictable increase rates.
With both Level and Decreasing Term Mortgage Life cover it is possible to add Critical Illness Cover, which will cover you if you are diagnosed with a critical illness or injury.
Unlike Income Protection, Critical Illness Cover will only pay out if you are diagnosed with a condition included on a pre-set list of health problems covered by your policy. On its own, it is not normally as effective as Income Protection when it comes to protecting your finances if you are unwell. You can find out more about this in our Income Protection vs Critical Illness guide.
Mortgage Life Insurance with Critical Illness Cover will cover you against death, terminal illness and critical illness. A policy will pay out if you pass away, if you are diagnosed with a terminal illness, or if you are diagnosed with a condition on your insurer’s pre-set list of critical conditions.
If you are interested in adding Critical Illness Cover to your Mortgage Life Protection, you will need to look carefully at your provider’s list of covered conditions.
Some providers cover more conditions while others are likely to cover more common conditions. It is important to find a list of conditions that will ensure that will able you to claim when you need it.
Independent Protection Expert at Drewberry
Where Mortgage Protection can cover two very different risks the monthly cost of Life Insurance is likely to be very different from the monthly cost of Mortgage Payment Protection. To provide come examples for both types of cover we have made a number of assumptions.
Given most mortgages are taken out on a joint basis we have provided cost examples for a couple who have just bought a house together where they took out a mortgage with a 25 year term to finance the purchase. We’ve assumed:
Joint Decreasing Life Insurance
30 Years Old
£11.58 per month
40 Years Old
£21.20 per month
50 Years Old
£55.98 per month
Where Accident and Sickness Insurance is based on an individuals health it tends to be set-up per person rather than on a joint basis.
As a result of this the pricing below is per person, for the purpose of our calculations we’ve assumed:
Accident & Sickness Cover
Accident, Sickness & Unemployment
30 Years Old
£7.38 per month
£29.68 per month
40 Years Old
£12.13 per month
£39.53 per month
50 Years Old
£29.87 per month
£60.37 per month
We work with all of the leading mortgage insurers in the UK, one size doesn’t fit all and so it is important to be aware of the nuances so you can make an informed decision when choosing the most suitable provider.
Aegon was founded as Scottish Equitable in 1831 in Edinburgh and their main headquarters still remain there today. In 2018 it won the ‘Life Insurer of the Year’ Award at the British Claims Awards.
AIG was founded in 2008 as Aegas Protect and was eventually acquired by insurance giant American International Group Inc. in 2014. In 2018, the company won the ‘Best New Product (Income Protection)’ Award at the Protection Review Awards.
Aviva first began as Norwich Union in 1797, which merged with CGU PLC in 2000 to become Aviva. Today, it is the largest insurance group in the UK. In 2017 it won the ‘Best Customer Service’ Award for the second year running.
With links going back as far as 1888, The Exeter as it is today was founded in 2008 when two friendly societies joined forces: The Exeter Friendly Society and Pioneer Friendly Society. As a mutual friendly society, it operates for the benefit of its members. The Exeter won for three years in a row the ‘Best Income Protection Provider’ Award between 2011 and 2013
Legal & General was founded in 1836 in a Chancery Lane coffee shop. In 2018, the company won the ‘Protection Provider of the Year’ Award at the Personal Touch Financial Excellence Awards.
Liverpool Victoria has won the ‘Best Income Protection Provider’ Award at the Investment Life & Pensions Moneyfacts Awards for 9 years in a row between 2010 and 2018.
The Royal London mutual society was originally founded in 1861, although originally as a friendly society. Today it is one of the largest mutual insurance providers in the country. In 2018, it received a 5-star rating for its protection service for the fifth year in a row at the Financial Adviser Service Awards.
In 2017, Vitality’s policy received a 5 star Defaqto rating and has done so for the past 8 years running.
Making a commitment to a mortgage can be daunting prospect, with such a large liability attached to your name it is important to make sure you are suitably protected. We exist to help our clients set-up the most suitable protection for their circumstances whilst doing so at the most competitive premium.
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to let us help.
Sam was very helpful and kept me informed at all times. Brilliant service.