If you have a mortgage, do you have a contingency plan in place in case a loss of income prevents you from making your monthly payments? Some people do, by way of what is known as mortgage payment protection insurance (MPPI). Sometimes known simply as "mortgage protection," this type of insurance makes your payments for you in the event you cannot make them yourself.
Unfortunately, many a homeowner has confused mortgage protection with standard payment protection insurance (PPI). That misunderstanding combined with the PPI scandal that broke a couple of years ago, has prevented far too many homeowners from getting basic mortgage protection through MPPI.
Secured Versus Unsecured Borrowing
The Guardian reported last spring about concerns among mortgage protection insurance providers that eligible homeowners were forgoing appropriate insurance when they did not need to. The provider's main concern was the belief that Brits largely misunderstand the difference between PPI and MPPI. If you are not sure of the difference yourself, here is how it works:
- Payment Protection Insurance (PPI) - PPI is an insurance product that protects unsecured credit like personal loans and credit cards. In the event that you are unable to make payments due to lost income or an illness, PPI makes payments for you, for a specified amount of time and up to a specified limit.
- Mortgage Payment Protection Insurance (MPPI) - MPPI is an insurance product specifically designed to protect your home in case you cannot make payments on your mortgage. The biggest difference with this type of insurance lies in the fact that your mortgage is considered secured credit. It is secured by the house itself inasmuch as the bank can repossess the property and sell it in the event of default.
The problem with PPI that brought it to the forefront is the fact that some providers were selling it inappropriately. They were pitching coverage to people who had no need for it, selling them policies that provided very little cover, and in some cases, even requiring consumers to purchase insurance as a condition of getting a loan. Government regulators have since set up new rules to prevent this type of thing from happening again in the future.
When it comes to mortgage protection, the environment is quite a bit different. Because it is attached to a mortgage and, by extension, your home, regulations have long been in place to prevent abuse. Mortgage protection insurance is a great investment as well as a tool to help you in the event of lost income.
Mortgage Protection Basics
In a general sense, mortgage protection insurance pays you a specified amount of money every month to be used towards your housing expenses should you lose your job or be unable to work after an accident, injury, or illness. Typical policies make payments for either one or two years. Beyond the basics, there is not much else these types of insurance programs have in common.
The least expensive cover starts at about £15 per month. You can get policies that are more expensive with additional features for £100 per month or more. When you start looking around for quotes, insurance companies will take into consideration quite a few different factors including:
- the amount of your monthly mortgage payment
- your employment and monthly income
- your age
- the number of income earners in your home
Keep in mind that your monthly premiums can change if your circumstances change. You should plan on premiums going up annually even if your circumstances do not change. Also, keep in mind that mortgage protection insurance is not your only option. You can also purchase a separate income protection (IP) cover if you so desire.
Income Protection Insurance
Income protection insurance is a similar product in the sense that it provides you with financial assistance should you find yourself unable to work. The big difference is that it is not specifically designated for your mortgage. Rather, your monthly benefits would be a percentage of your regular income for a specified amount of time. You could use that money for any expenses, including your mortgage.
For maximum protection, people sometimes purchase both types of cover together. The mortgage protection insurance makes payments directly to the mortgage lender while the income protection provides income directly to the homeowner. Between these two policies, the average homeowner should probably be able to make ends meet during a period of extended unemployment.
Be Careful of Exclusions
Any type of insurance product is going to have certain exclusions in place to protect the provider. This is certainly reasonable. When it comes to mortgage protection insurance, it is incumbent upon homeowners to know exactly what those exclusions are. Here is a list of some of the most common ones:
- Initial Waiting Period - In order to prevent homeowners from taking out mortgage protection insurance just prior to seeing a doctor, insurance companies often institute an initial waiting period of at least one month. Some providers stretch that out to six months. In either case, should you become unable to work during the initial waiting period you will not be eligible to receive payments.
- Certain Employment Exclusions - Some basic MPPI plans exclude certain types of seasonal jobs or occupations involving self-employment. If your work is considered non-traditional, it is important to check the fine print of any mortgage protection insurance quote to make sure your employment is not excluded.
- Pre-Existing Medical Conditions - If you suffer from a pre-existing medical condition likely to render you incapacitated in the future, you may not be covered for that condition. How insurance providers deal with pre-existing medical conditions depends on their own policies. Some offer no cover at all while others offer limited cover based on certain conditions.
- Mental Illness and Back Problems - Back problems and certain mental conditions like depression constitute the vast majority of circumstances not allowing people to work. However, because such conditions are often difficult to prove medically, some insurance companies are reluctant to cover these conditions. Those that do usually require very specific documentation from a medical professional to prove the condition exists and is preventing the individual from working.
Mortgage Life Insurance
An obvious exclusion to mortgage protection insurance is the death of the homeowner. Unfortunately, this is not something typically understood by the average homeowner. If you want protection for your home in the event of your death, you cannot rely on MPPI for that protection. You will need an extra type of cover known as mortgage life insurance.
Mortgage life insurance usually pays off the balance of your mortgage in the event of your death. This type of cover comes with several different options and its own exclusions, so you need to be thorough in your research before buying cover. However, if you are concerned enough to purchase MPPI, you probably should consider mortgage life insurance as well.
Before you purchase mortgage protection insurance it is a good idea to sit down and think about your monthly expenses and how much you want to cover. You will want to do this because there are several different levels of cover you can choose.
For example, basic coverage will pay you a certain amount toward your mortgage and nothing more. If you want additional coverage, you can increase it to include other expenses like your utility bills. In most cases, the monthly payment limit generally does not go higher than about £3,000.
Once you decide how much cover you need, you also have to consider how much you can afford in monthly premiums. With these two figures in mind you can approach the quote process with the mindset of already knowing what you are after. This lowers the chances that you will be manipulated into purchasing inadequate protection.
Once you start looking for quotes, it is a good idea to get as many as possible. The more quotes you have at your disposal, the more likely it is you will find the best policy at the best price. Also, remember to be diligent about comparing quotes line-by-line. Just because a particular cover option is the cheapest does not make it adequate. Likewise, the most expensive cover is not always the best either.
For most people their home is the single most important financial investment deliver make. Protecting that investment with mortgage protection insurance is a very good idea. Cover is cheap enough that the average homeowner should be able to afford at least basic coverage. If you can, you should strongly consider purchasing this cover. Should you ever find yourself incapacitated by illness or injury it can mean the difference between saving your house and losing it to your bank.
Mortgage protection insurance is available from dozens of direct providers and the brokers. Here are some helpful links to get you started with some reputable companies:
Paymentcare - An independent provider of mortgage protection insurance. Here you will be able to get quotes and review a comprehensive library of insurance information.
Ant Insurance - Ant offers both six and 12-month policies for straight mortgage protection. For an additional fee, you can add up to 25% to help pay other bills.
Drewberry Insurance - Get both mortgage protection and mortgage life insurance policies here. They work with underwriters like Aviva and Bupa.
helpucover.co.uk - Offering a low-cost mortgage protection and other speciality insurance is. Their MPPI starts at just £3.90 per £100 of coverage.
Use the following links to compare quotes among dozens of different providers offering mortgage protection insurance. This is the quickest way to get multiple quotes simultaneously:
Go Compare - Get quotes from companies offering mortgage protection from six to 24 months in length. While on the site, you can download their free mortgage guide.
Money Supermarket - Offering FREE quotes on more than 130 mortgage protection insurance products. Their mortgage protection insurance guide will help you understand the entire process.
Confused.com - Provides quotes from some of the best-known mortgage protection insurance companies. Here you can get quotes ranging in length of up to 24 months.
Compare the Market - With a single form, you can submit your information for multiple quotes here. You can choose standard mortgage protection insurance or add extra cover to pay your utilities and other bills.
Money.co.uk -Compare quotes on more than 600 mortgage protection insurance products from some of the UK's most well known providers. You can also enter your question in their dedicated question box and receive an answer right away.
QuoteZone -An independent insurance comparison website offering quotes on mortgage protection insurance from multiple providers. Get quotes for all your other insurance products here as well.
Money Saving Expert - When you visit this site you will find all of the information you need to know about MPPI. This is one of the most comprehensive financial information sites on the web.