Mortgage payment protection insurance
Mortgage Protection Insurance from British Insurance
Rises in the average level of debt taken on by the average British household are well publicised – the problem led to the credit crunch, impacting on the world economy in early 2008. For many families, the largest debt they have is their mortgage, taken out to buy their home. A mortgage is usually the biggest debt we will incur in our lifetime usually the one that takes the longest for us to pay off – but what if we suddenly couldn't do this and keep up with the payments – this is where mortgage protection insurance comes in.
Mortgage protection insurance is more commonly known as mortgage payment protection insurance or even MPPI – do not be confused by this variation in names – they all apply to the same thing. Broadly speaking mortgage protection insurance is an insurance policy taken out to guard against the policyholder suddenly being unable to pay their mortgage instalments through something unforeseen happening such as accident, sickness or unemployment. This means they have been deprived of an income and have been unable to work because of poor health, an injury from an accident, or involuntary redundancy.
The market for this kind of insurance is extremely broad and competitive, although not everyone realises this. The market is part of the payment protection insurance industry – many people take out general payment protection policies, and mortgage protection insurance is a part of payment protection sold specifically to match payments only on your mortgage. It is especially attractive to people who don't feel the need for a far-reaching payment protection policy or for people who want some kind of safety net against the unexpected, but can't afford a broader policy.
Starting with the usual features, a mortgage protection insurance policy will require you to make a claim should you lose your income unexpectedly. Rarely will you provider start to pay out to straight away – there will be a kind of holding period first, perhaps of 30 to 90 days. Once this is up, the cash kicks in and your insurer will pay, tax-free, a portion of your mortgage payments and attached costs like the interest, and buildings and contents insurance. The idea is to keep the roof over your head until you are back on your feet and have a job again – this may require a recovery period or an employment-hunting session.
Not everyone will qualify for a policy – the self-employed are not always guaranteed, for example. Also, policies will pay out for a long time, perhaps 12-24 months, but not indefinitely.
Insurers will usually provide a ceiling on how much of your monthly payments you can protect and this may mean you can't insure the whole regular payment. There could be a limit of about £1,500 or £2,000 – of course, if you have a very large mortgage, this might not be enough. If this is the case, consider how you will make up the rest. An increase in how much you put into a regular savings account might be an idea.
Welfare State a Poor Safety Net
If you are about to take out a home loan, or have just done so, more costs such as insurance may seem a bit daunting. You already cover your car, and if you have been renting, your contents too. A pet or similar will often also be insured. So how does more insurance sound? Not great, probably. Besides, doesn't the State look after you if you are unable to work because of ill-health? It does, but it is unlikely to cover your mortgage payments. If you have no savings you could find yourself in a tight spot very quickly without mortgage protection insurance.
For a small fee each month this problem could be eased or go away completely should the unforeseen happen.
A word of caution though – mortgage protection, as part of the payment protection industry, is part of a market under scrutiny from the Competition Commission. If you've already been looking into purchasing this kind of cover, you've probably already realised that the market can be baffling – a spider’s web of similar-sounding terms, none of which you fully understand, which lead on to pages and pages of small-print text.
Mis-selling was, and maybe still is, a problem
The Commission is investigating because some providers have been accused of mis-selling policies to people who don't really need them. Some people have been pressured into taking out a mortgage protection insurance policy without fully knowing what it really is or what it will cost them in the long run – often from their home loan lender as they are about to sign on the dotted line. You are under no obligation to take policies offered to you in this manner in order to successfully get your hands on the home loan – but this may not be made fully clear to you. If you don't understand something, ask for a detailed explanation. Do not assume you are not being taken for a ride.
That high-street name all too keen to hand a piece of paper and pen over the desk to you is also not the only kind of firm able to offer you cover on the home loan you are about to take out. Smaller-scale, independent companies can do it for you too – often at a much cheaper price.
More affordable premiums are out there for younger home buyers too, and specialist cover providers will give you a policy even if you are self-employed in some cases. The word 'repossession' is not pleasant to anyone's ears, and a tottering economy could mean you are less sure of your financial security in future. Don't let this mean you accept the first type of mortgage protection insurance that comes along or that you accept an inferior deal. Shop around thoroughly and take independent advice – you could save yourself a packet and also save the roof over your head in the process.
