Explaining mortgage payment protection insurance
- 16TH JUNE 2007
If you lost your job or were unable to work, and that resulted in no income coming in then how would you financially survive asks Simon Burgess, Managing Director of British Insurance? He says that the answer probably is not how you would survive but for how long would you survive. A day or a week may be fine but two months or three months might start to see real financial hardship hitting in.
The position can be worsened if you have just taken on a high regular financial commitment such as a mortgage. The new house may have already taken up any spare capital you have. First time buyers are more likely to be hit because they will have had to scrape together the initial deposit.
Many still believe that the state would step in and provide assistance but that may not be the case. Certainly you would need to check the position relative to your own circumstances but general having savings over £8,000 or a full time working partner could stop the state stepping in. The state will only provide assistance with interest payments and not capital. The state may only give help with interest payments on mortgages up to the first £100,000. If your mortgage was taken out after October 1995 then state benefit will not be available until 9 months have passed.
Mortgage payment protection insurance is designed to provide a monthly benefit for up to a maximum number of months, typically 12 months, if the insured person is unable to work due to accident of sickness or is unable to work due to involuntary unemployment. A minority number of policies will provide benefits for up to 24 months. The monthly benefit limit is selected by the insured and can include both mortgage interest and capital repayments plus associated insurance costs. Insurers do have maximum levels of monthly benefits and this might, for the very few, limit the sum they can insure.
The application form only asks a limited number of questions and the premium is calculated as a flat rate based on £x premium per month for each £100 of benefit insured each month.
The most competitive premiums rates are usually available from specialist payment protection providers and more than often from those selling on the internet where overheads are lower. Premiums in the region of £4 per £100 of cover are available and so this type of cover provides an attractive peace of mind. Mortgage lenders and arrangers often like to offer this type of cover as an option with the mortgage quote. Be wary as that may not be the most competitive premium available and you are strongly urged to shop around.
Check the cover out carefully as terms and conditions do vary and some covers are not as good as others. For instance the better policies will offer ‘back to day one’ cover. That means that whilst you must be unable to work for over 30 consecutive days, once that period has passed benefits are calculated from day one when you stopped working. The not so good policies can have up to a 60 days excess and benefits are then not calculated until days 61.
Whilst we may make these policies sound good they are not always suitable for everyone.
All these policies include an exclusion for pre-existing disabilities. That is something you suffered with before the cover start date. There is also an exclusion of chronic conditions.
For self employed persons most policies require that your business cease trading and is in the process of being wound up. Some policies go further than this and require even that process to be involuntary.
The unemployment must be involuntary. So voluntary redundancy, early retirement, temporary work or seasonal work are all excluded.
