Mortgage protection insurance
At expatriates.co.uk we know that financing property through a mortgage which may run for 25 years or longer is a considerable undertaking. Almost without exception, everyone who owns a property be it for residential use, business use or for investment purposes will insure the the property against loss but when it comes to taking out insurance to protect their mortgage, people become reluctant and assume nothing will ever happen to them.
Paying off a mortgage can take a lifetime and over the period of your loan you could face many misfortunes that might prevent you from repaying your mortgage and were that to happen it could result in your property being repossessed by your lender.
For the reasons stated, guaranteeing the security of your mortgage financing arrangements is not only sensible but vital if you want to keep your family secure.
The products that are available to provide the protection you need fall into two categories as shown:
- Mortgage Life Insurance– this type of insurance is intended to cover your family were you to suddenly die in the middle of repaying your mortgage. Were this to happen, your mortgage life cover policy will repay the entire loan, allowing your loved ones the security of remaining in the family home.
- Mortgage Payment Protection Insurance (Mortgage PPI)– this policy steps in if you find yourself without an income due to accident, sickness or (potentially) unemployment and you are then unable to meet your mortgage payments.
Typical features of these policies
Mortgage life insurance
As the policy you will take out is intended to be suitable to pay off the outstanding mortgage loan on death, it is necessary to consider the repayment arrangements that have been made for the mortgage product. The two types of mortgage repayment types are:
- Capital and interest repayment – What happens in this case is that a portion of the monthly mortgage payment goes towards reducing the amount of the loan while the remainder of the mortgage payment goes towards paying the interest accrued in the month. With this type of mortgage repayment vehicle, the mortgage loan will be completely paid off by the end of the mortgage term.
- Interest only – In this situation only the monthly interest on the mortgage loan is paid and at the end of the mortgage term, the full amount of the loan will still be outstanding and become due to be repaid to the lender.
Using these two repayment scenarios it can be seen, that at any stage during the term of an interest only mortgage the full amount of the mortgage loan will have to be covered by the insurance policy as the amount of the mortgage loan always stays the same. In the case of capital and interest repayment mortgages, the outstanding mortgage loan will reduce slightly every month. This means that the insurers liability is reducing as the amount the insurer will have to pay out gets less as the mortgage term progresses. This is called decreasing term insurance.
- Level term insurance – the monthly premiums remain the same throughout the term of the insurance.
- Decreasing term insurance – The monthly premiums will reduce over time to reflect the insurers reducing risk as the mortgage term progresses.
Applying for a mortgage life assurance policy
As this is a life insurance policy the application form will ask about your age habits and general health and require you to disclose any known conditions you have had. As the insurer will calculate the premiums based on this information, it is vital that you fully disclose everything to the best of your knowledge. Where you have had potentially serious conditions the insurer may refer you for a medical examination. This is not something to be avoided, as it gives the insurer a true picture of your current health which cannot then be disputed at some later date.
Many people make the mistake of not disclosing things to their insurer, thinking it will never be picked up. However, in the event of a claim being made, the insurer will refer to the information originally provided and if that is found to be wrong then the insurer would be within their rights to refuse to pay out.
Mortgage Payment Protection Insurance (Mortgage PPI)
The following explains some of the more important features that you will typically find with this type of policy.
- Insurance choices – Usually a choice of cover options will be available such as:
- accident and illness (disability) and involuntary unemployment cover.
- Accident and illness (disability) cover only.
You can also usually select an optional excess period of either 30 or 60 days.
- Features and benefits – the following explains some of the more important features and benefits that you will typically find with this type of policy.
- These are renewable annual contracts with premiums payable by monthly instalments.
- The insurer will only amend the premiums or any terms and conditions at the renewal date.
- These policies are designed to protect your monthly mortgage payments if you are unable to work due to accident, illness or involuntary unemployment, including giving up work to become a full-time carer.
- Benefit payments are made monthly, usually up to a maximum of twelve months for each successful claim.
- There are maximum payments that will be made, usually around £2000 or 75 percent of your gross monthly income, whichever is the lowest. Payment can be up to 125 percent of your monthly mortgage payment to allow you to pay extra bills.
- Accident and illness benefit can continue if you return to work on temporary reduced hours
- Qualifying conditions – to be able to qualify for this type of insurance you must meet the following:
- You must be a mortgage holder over 18 and under 65 years of age.
- Working a minimum of 16 hours per week for at least 6 months.
- Have not been absent from work due to illness or injury other than for minor things such as colds or flue.
- Not be aware of any pending job loss
- Not be aware that you may have to become a full-time carer.
- Significant Exclusions and limitations – The following defines some of the exclusions and limitations that may be applied to these policies. You will not be able to claim if:
- You have had a known medical condition in the 12 months prior to your policy starting that hasn’t been declared.
- Have a mental or nervous disorder without having provided medical evidence.
- Have had a self-inflicted injury or been subject to alcohol or drug abuse.
- Knew you would be made unemployed prior to taking the policy.
- General notes – Some things to remember
- You must have been off work for at least 30days in a row to be entitled to benefit.
- Any benefit you receive may affect your rights to state benefit.
- While you are claiming, the premiums must continue to be paid until the renewal date.