What is mortgage protection insurance?

4th April, 2016

Mortgages are likely to be the biggest and longest ‘loan’ any individual or couple will take out in their lifetimes. But what happens when incomes dramatically change due to a death, illness or unemployment and how can you protect your home and your loved ones if this happens. Mortgage Protection Insurance ensures that if there is an significant change in circumstances such as death or a critical illness then the pay out is sufficient to clear the mortgage or if you are unable to make your monthly payments for a given length of time due to an accident, sickness or a term of unemployment but expect to return to work your policy will cover the payments protecting your home.

There is a wide range of Mortgage Protection Insurance policies out there to choose from and many people find it a daunting task to decide upon the right one for them.

Here’s a simple guide to the main types of mortgage protection insurance policies available:

Life and Critical illness

This type of policy is taken out for the value of your mortgage so that in the event of a claim the mortgage would be paid off.

  • Single life

This plan covers one person, for the loss of life.

  • Joint life first death

This plans covers two people in case of the loss of life and pays out when the first person dies.

  • Joint life second death

As with first death, this plan covers two people, but pays upon the death of the second person.

  • Joint life double cover

Two people are covered in this plan, with a separate policy for each. Payments are made upon the death of each person.

  • Life of another

One person can take out a policy in case of the death of another.

Additions and adaptations

All these policies can be added to and some can be adapted to protect against less permanent problems than the death of a policy holder but which still can have a devastating effect on families and finances.

  • Critical Illness

This cover is often added, but not essential, ensuring payment is received in the eventuality of a serious illness that prevents the normal life functions of the person covered.

  • Income Protection

Also added to cover mortgage payments in the event of sickness or accident that prevents work for a period of time. The amount covered is calculated on your income. Income Protection differs from Critical Illness cover in that the person covered is expected to return to work.

  • Unemployment Protection

This addition covers you in case of redundancy. It is not the case that your mortgage payments will be protected if you voluntarily make yourself unemployed.

How the payments are made

‘Term assurance’ is the phrase used to describe how your insurance policy will pay out. There are a number of choices.

  • Level term assurance

Level term assurance offers the payment of the policy as a tax free lump sum in the event of death. The value doesn’t change and there is no investment element so if the plan ends and premiums cease, there is no value to it. Level term assurance policies are usually best suited to an ‘interest only’ type mortgage.

  • Decreasing term assurance

The cover provided by this type of policy is for a set period of time only. You still receive a tax free lump sum payment in the event of death, within the term of the policy. As with level term assurance, there is no value to the policy if premiums cease and the policy ends. The term ‘decreasing’ is used to describe how the value of the cover reduces over the period of time the policy is set for. Decreasing term assurance is often recommended for prepayment mortgages.

  • Family income benefit plan

This is the plan which pays a regular income to surviving family members in the event of death. There is no lump sum payment and again no value to the policy if premiums cease. Payments start from the date of death and continue to the date specified when the policy was taken out.

If you have any concerns or wish to talk over your options to protect your family in the event of a tragic change in circumstances give us a ring on 01869 248339 and we can arrange to discuss all your options.