Mortgage protection insurance
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How to save money on income protection
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Learn how to save money on income protection insurance with our special guide...
What is mortgage protection insurance?
Being Englishmen/women (and Scottishmen/women, Irishmen/women and Welshmen/women), our homes are our castles. Always have been, always will be. We may dress them up in some peculiar ways on occasions – both internally (anyone recall those ghastly 80s interiors??) and externally (stone-cladding, anyone??) – yet we continue to guard them with our lives. And why shouldn’t we? They are after all THE most expensive commodity we will probably ever own, they keep us warm and dry, provide security for our family and sometimes even make us a little bit of money. OK. A great deal of money if you’re a property developer or estate agent. But then we’re talking about our domestic living arrangements rather than a bricks and mortar means of making a living.
From the very first time we hold a little green or red plastic house in our equally small hands while learning the Monopoly ropes as a child (yes, there were games that didn’t involve a games console once upon a time), it’s every adult’s dream to be in a position to purchase their very own house/castle at some point. And from the exact moment we take the keys from the estate agent it’s our life’s remaining ambition to hold on to what we’ve worked incredibly hard to achieve as we edge ever closer to paying-off our mortgage.
However – and as nice a picture mentally painted as this is – what would happen if we could no longer afford our mortgage payments? What, for instance, would happen if we lost our jobs through no fault of our own (redundancy, illness, injury, etc…)? How would we cope and what would we do? Well, the answer is we’d all struggle for so long and then – unable to do anything about it – we’d probably have our homes repossessed. All is not lost though, as this scenario can be avoided if you arrange yourself some mortgage protection insurance.
Mortgage protection insurance could be the silver lining to the clouds which spell out redundancy, long-term sickness and/or serious accident. Essentially it’s the insurance industry’s answer to your prayers should any of the aforementioned experiences befall you in your life, and more pertinently whilst you’re still in the expensive throes of paying off a mortgage on your home.
As you can no doubt imagine, any of the above life events striking will hit the homeowner hard in the pocket and subsequently put their house at risk. Mortgage protection insurance can make your monthly repayments on the policyholder/homeowner’s behalf if they can no longer meet them. The cover doesn’t last forever though, on average making mortgage repayments on your behalf for a maximum of 2 years and not normally in full.
Typically a mortgage protection insurance policy will take care of some 65% of your monthly income (prior to the policyholder being unable to continue their employment for pre-defined reasons), or around £2,000 per month. In the majority of circumstances insurers will allow policyholders to claim up to 125% of their mortgage, which will also take into account extra costs such as utility bills and council tax.
Split three-ways, your mortgage protection policy call come in any one of the following ways, shapes or sizes, each acting as a safeguard to a certain degree. Unemployment only, accident and sickness only and accident, sickness and unemployment.
As it pretty much states on the tin, unemployment only will pay-out if you’re made redundant by an employer, but will only be qualified by the insurance provider if you’re registered as unemployed with the government and recognised by them as actively seeking work.
Accident and sickness cover will offer an alternative financial means to a mortgage repayment end should an injury or long-term illness prevent you from carrying out/holding down a job.
However please note that any injury suffered needs to have been classed as unavoidable for this policy to be ratified and actioned by the insurer; which beforehand requires certification from a GP to sanction the next stage.
Accident, sickness and unemployment obviously covers for every eventuality which would ultimately restrict the mortgage protection insurance policyholder’s ability to work.
Also worth flagging up is the fact that a mortgage protection insurance policy comes with what’s referred to as a deferred period, which is essentially the passage of time which needs to elapse prior to your payments kicking in, and historically ranges from 1 to 3 months. To put it another way, if you elected to go with a 30 days deferred period then you would have to wait an initial 30 days from when you submitted your claim before you started receiving payments.
Exclusions shouldn’t be a surprise to anyone and include the policyholder deliberately injuring themselves, having pre-existing medical conditions, having prior knowledge regarding a redundancy, accepting voluntary redundancy, having chronic medical conditions (long term and incurable) or being pregnant and facing imminent childbirth; all such cases could render the policy null and void.
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Do I need mortgage protection insurance?
You bet your life you do if you’re a homeowner. Not by the law of the land you understand, rather because having a mortgage protection insurance policy in place will cover for a multitude of unavoidable sins. But way in advance of coughing up for any form of mortgage protection insurance it’s vitally important to gauge whether or not it’s right for you and your personal circumstances.
It could be that you don’t actually need any additional cover for accident, sickness or unemployment after all, thanks largely to any one (or combination) of the following instances. Firstly you may be in line for a sizeable redundancy pay-out from the employer who’s about to relinquish you of your hitherto duties. But then this severance pay alone might not last the remaining term of your mortgage repayments. Plus you could be waiting longer than you imagined to find suitable alternative employment. Will this single pay-out cover mortgage repayments, utility bills, loans and the cost of living generally? What’s more, should you get another job you might suffer an injury or illness which incapacitates you in the future. Always think the long game.
Secondly your present employer could well be extremely charitable when it comes to sick pay, and in the event of you being struck down by long-term illness or injury the chances are they could support you for an indefinite period. Which is all well and good, however this still doesn’t shield you (and preserve your financial interests) if you then lose your source of income further down the line due to sudden and unpredicted redundancies taking effect. So it would be wise to invest in the unemployment only mortgage protection insurance policy just in case.
Third and finally you may already be more protected than you first thought, courtesy of another insurance product that you have. Like for example a permanent health insurance plan which will automatically pay-out a percentage of your pre-injury/illness income if future injury/illness compromises your full-time earning potential. While this type of product is traditionally more expensive, in its defence it usually pays-out for longer periods and can also be used in collaboration with any unemployment only mortgage protection insurance plans.
How much does mortgage protection insurance cost?
On average you can find – and immediately start paying into – a mortgage protection insurance premium from under £20 per month, based on a 30-year old policyholder with a regular income of £26,500 and having mortgage repayments totalling £1,000 per month.
To cover a £700 a month mortgage repayment, it’s possible to arrange a policy for just under £10 a month, however don’t forget that in most cases the very cheapest policies will have a longer ‘excess period’, maybe up to 190 days.
For those policyholders over 50 years of age, then the ball-park figure rises to around the £30 per month mark to align with the underlying fact that they are seen as more likely to suffer from an illness or injury or indeed, in an age-range more prone to redundancies.
Remember that these quoted figures are only guide prices and premium costs will fluctuate depending on your individual circumstances.