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Mortgage Protection Insurance or Life Cover – Which Should You Choose?

happy couple at home What is mortgage protection insurance? How does it differ from life insurance? And do you need one, the other, or both?

What is mortgage protection insurance?

Like around 25 million other people in the UK, you have a mortgage. Each month, you make another payment and gradually the amount you own on your home decreases. One day it will be yours. But what happens if you can’t afford to pay the mortgage? Mortgage protection insurance ensures that, if you are unable to pay the mortgage because, for example, you’re made redundant or fall ill, your payments will be covered for a period of time.

How does mortgage protection insurance work?

Mortgage protection policies vary in their nature and scope, but all will help you pay for your mortgage if you hit a difficult period: Mortgage payment protection insurance (MPPI): An MPPI policy is designed to ensure your mortgage payments are covered for between one and two years. Sometimes, a policy will pay more than your mortgage amount (up to 125%) to help you cover the cost of bills too. Usually, there’ll be an exclusion period after you initially take out the policy during which time it won’t pay out. That will typically last up to a couple of months. Income protection: As the name suggests, income protection policies are designed to replace a chunk of income if you are unable to work through illness or accident. You can use payments from a claim to cover your mortgage but the money can be used for anything. Policies can be long term, covering you until you reach retirement, or short term – you’ll pay more for the former than the latter. You may be able to include redundancy in your policy but you’ll pay more for that too. Critical illness: This type of mortgage protection will pay a lump sum if you are diagnosed with any of the medical conditions included in the policy. The specific conditions included vary from insurer to insurer, but will usually include certain types of cancer, stroke, multiple sclerosis, Parkinson’s disease, diabetes Type 1, heart attack and more.

Is mortgage payment protection insurance the same as PPI?

It’s similar, and the end effect is often the same, but PPI (payment protection insurance) tends to be taken out with your mortgage provider and any payments made as a result of it will go straight to the lender; they won’t come to you.

What types of mortgage payment protection insurance are there?

Mortgage protection insurance (as opposed to critical illness or payment protection policies) usually covers up to three circumstances: unemployment, sickness, accident and injury. Your policy may cover you for one of the above, or you could combine all three elements in a single policy. The cost of your policy will depend on whether you cover one, two or three elements and will be influenced by the level of cover you need, your age, salary and your job. Your monthly premium is likely to be less if you’re a graphic designer, for example, than if you’re a circus performer, because the risk of injury will be significantly lower.

How do mortgage protection insurance & life cover differ?

Mortgage protection cover and life insurance are not the same thing. Life insurance will ensure that, if you die, there’s a sum of money left for your loved ones. That could be used to pay down the mortgage, but the money could be used for any purposes. Unlike mortgage protection insurance, life cover isn’t designed to cover things like illness and redundancy. And unlike life insurance, mortgage protection cover doesn’t pay out on your death.

Are mortgage protection insurance or life insurance compulsory?

If you are taking on a mortgage jointly with someone else, some mortgage lenders may require you to take out life insurance so your partner could continue to cover the cost of the mortgage if something were to happen to you. Mortgage protection insurance is not compulsory – that is, no mortgage lender will make it a requirement – but it is important to consider what would happen if you were unable to work. A protection policy could prove critical in ensuring you are able to stay in your home without falling into arrears until you are able to resume work.

Should you choose mortgage protection insurance or life insurance?

It really isn’t an either/or question. The two types of cover protect you or your family in different ways at different times. For the greatest level of cover, you might want to look at both mortgage protection insurance and life insurance. To find out which policy would be right for you, talk to us today.