Mortgage Protection
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Mortgage Protection
Michael Iwinski talks to us about mortgage protection.
Podcast approved by The Openwork Partnership on 08/11/2024.
What is mortgage protection insurance and how does it work?
Mortgage protection describes types of insurance that can help pay off your mortgage if you become too ill to work or you pass away.
What are the different types of mortgage protection insurance available in the UK?
The first and most common option is life insurance, which will pay off your mortgage in the event of you passing away or suffering from a terminal illness.
A more comprehensive option is critical illness cover, which lists out many conditions. If you were to be diagnosed with one of them, your outstanding mortgage could be repaid, partially or in full.
Please note, the cover doesn’t have to be used to repay the mortgage if that is not the beneficiaries wishes, but it is a good idea to consider using it to clear the mortgage and ease financial stress.
There’s also income protection, which replaces a percentage of your income if you lose it due to an accident or sickness. Less common is family income benefit, which is a type of decreasing insurance. Instead of a lump sum being paid in the event of a claim, a monthly payment is set by the policyholder at the time of application, for the family to receive monthly payments for a specific period of time.
One that is less common nowadays is mortgage repayment protection, which basically covers your mortgage payments for a set period of time should you have an accident or other reasons covered by the policy.
This type of insurance is usually optional and covers your mortgage payments for a maximum of 12 months.
What are the benefits of mortgage protection insurance?
Mortgage protection gives you financial security. It can help ensure your family can stay in their own home if you die or become unable to work due to sickness. It gives you peace of mind to know that your biggest financial commitment is covered.
Do I need mortgage protection insurance if I already have life insurance?
It’s a very common question. We always recommend having mortgage protection on top of life insurance, because it can have a different term and level of cover – as life insurance is usually set up for family purposes, to cover your mortgage.
You should also consider the additional flexibility that a separate mortgage protection policy could give you. Because, for example, you might sell the house, upsize, downsize or repay the mortgage quicker.
You might receive money as a part of inheritance, a pension fund or other sources. Your mortgage protection policy can be amended or removed if needed, while your family life insurance could remain in place.
What factors should I consider when choosing a mortgage protection insurance policy?
Choosing the right cover is key. We always strive to recommend the right policies as we want to deliver on our promise. That’s our top priority.
We find that clients coming to us often have the cheapest plan in place, arranged elsewhere. But your mortgage is one of the biggest, if not the biggest financial commitment of your life. For me and our team, it is crucial to choose the right cover.
We always recommend providers with the most thorough terminal and critical illness definitions. Our overall experience with providers is also very important – we always turn to insurers with very good claim process experience and great customer care.
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Can I get mortgage protection insurance if I have a pre-existing medical condition?
In that case, your scope of options will greatly reduce, but the protection market has developed greatly in recent years.
I remember 10-15 years ago there were no real options on the market for customers with a history of cancer. But now it is possible to find decent cover, although exclusions or loaded premiums will most likely be imposed.
Are there any exclusions or limitations to mortgage protection insurance policies?
Your exclusions will be listed on the policy schedule and most exclusions are for clients with riskier occupations. Total disablement on occupation benefit might be excluded from critical illness cover, for example. Clients with a medical history can have some exclusions too.
We also need to remember that schemes like mortgage holidays, where customers suspend mortgage payments or change their repayment type temporarily, may cause a situation where the policy payout would not cover the outstanding loan in full.
How long does mortgage protection insurance coverage typically last?
We always recommend matching cover to your mortgage term, obviously, but sometimes customers contact us to review their protection provision. In some instances they have policies where the term doesn’t match the mortgage – and this is bad advice.
If clients make overpayments, the mortgage term reduces, so it is vital to review your mortgage cover regularly, as the term of the policy might no longer match the mortgage term. If we can amend that, you may save some money.
What happens if I can’t pay my mortgage due to unforeseen circumstances?
That’s more a question for the lender, really. If you can’t pay your mortgage due to unforeseen circumstances, contact your lender as soon as possible. There may be some options they can offer you.
You could potentially take a payment holiday – basically a break from paying your mortgage. They could extend your mortgage term. By borrowing over a longer period of time, you can reduce your monthly payments. You could switch to interest only repayments temporarily, again reducing the amount you have to pay each month. In that case, obviously, you don’t repay the capital.
It could be that you can pay what you owe over instalments, if you can’t pay the full amount.
This is very important – your lender should only take you to court to repossess your home after exploring all the options. They can’t start this process until you owe a total of three months worth of payments.
What is the cost of mortgage protection insurance and how is it calculated?
A number of factors define the premium, such as client age, the mortgage term and the type of policy. Also included are your lifestyle, occupation, medical history, your family’s medical history and numerous add-ons that you might include in your policy.
The cheapest policy would usually be simple life cover. Basically, if you pass away or suffer from a terminal illness, the policy pays out. The most comprehensive would be life and critical illness cover, giving you peace of mind, but that comes at a cost.
Is mortgage protection in insurance mandatory in the UK?
Although strongly recommended, mortgage protection is not mandatory in the UK at the moment.
Can mortgage protection insurance cover more than just the outstanding mortgage amount?
Due to its specifics, mortgage protection’s sole purpose should be to repay the outstanding loan in the event of death, terminal illness or critical illness, for example.
But we have to remember that about 95% of borrowers do not repay the outstanding mortgage in the event of a claim. That money probably goes towards security for the family’s future, maintaining their standard of living and coping with illness or death. The priorities often change when something like this happens.
Can mortgage protection insurance help with other financial obligations besides the mortgage?
The proceeds go to the client or their family, not to the lender. So there is no obligation to repay the loan, as long as the monthly repayments can be maintained – or the mortgage can be transferred from joint to sole applicant if required.
What are the alternatives to mortgage protection insurance?
It could be, for example, a private pension fund that would cover the outstanding loan once you are over 55, at which point you can release some money tax-free.
Perhaps you have other assets or investments that you can dispose of, or possibly large savings that you have accumulated over the years.
What else do we need to know about mortgage protection?
We try to persuade our clients that mortgage protection is key, as part of the biggest commitment of your life. We always ask the client what they would do if something were to happen to him or her.
We have to remember that losing one salary into the household could bring potential financial issues. Mortgage protection could give you really good security for many years to come. The 30 or 35 years of a mortgage is a long time in everyone’s life.
Approved by The Openwork Partnership on 08/11/2024.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.