Mortgage protection insurance explained

To help you decide if mortgage payment protection insurance is right for you, we've compiled a short guide that explains what it is and how it works.

What is mortgage protection insurance?

Mortgage payment protection insurance pays out an amount equivalent to your monthly mortgage payment if you are unable to work due to accident, sickness or involuntary unemployment. It is often referred to by its abbreviated form - MPPI.

It tends to offer short term cover only, usually for 12 months but can range from 6 - 24 months, as it’s expected that within that period you will have found alternative employment or recovered from your illness or injury.

Why do I need it?

Mortgage payment protection insurance may be suitable for you if:

You would struggle to maintain your monthly mortgage payment in the event that you are unable to work due to illness, injury or involuntary unemployment.
You are self-employed.
You do not have another insurance policy in place to provide cover for loss of earnings e.g. income protection insurance.

Is it really necessary? What about State benefits?

State benefits provide limited support and some benefits require a prolonged period of incapacity or unemployment before you become eligible.

You can visit the Directgov website to find out more about benefits and financial support^†

Is mortgage payment protection insurance the same as payment protection insurance?

No, but it is similar. Payment protection insurance provides cover for personal loan repayments and/or minimum monthly credit card repayments if you are unable to work due to accident, sickness or unemployment. It is sometimes referred to by its abbreviated form - PPI - and tends to offer short term cover. It can cover a wide range of bills and commitments and therefore premiums can be a little more expensive.

Is mortgage payment protection insurance the same as income protection insurance?

No. Income protection insurance is designed to replace your income with a monthly payout if you are unable to work due to injury or illness. It is sometimes referred to by its abbreviated form - IP insurance.

There are two main types:

Short Term (Accident Sickness and Unemployment) (Payment Protection)
These are plans that pay out for 12 –24 months, and are designed to be low cost, simple and available to the majority. They usually exclude things like pre existing medical conditions, back problems and stress but can be extended to cover unemployment.

Premiums are often based on age, but are not affected by the type of employment of your medical history.

Long Term (Permanent Health Insurance)
These are plans that focus on health not employment and provide you with a long term income and pay for as long as you will require usually right up to your normal retirement age. To do this they have to look more carefully at your medical history and type of work and the risks are reflected in your premium.

What cover options are available?

When you take out a MPPI policy you will normally have the following cover options:

Accident, sickness and unemployment
Accident and sickness only
Unemployment only

A MPPI policy can be used for both repayment (capital and interest) mortgages and interest-only mortgages; depending on the provider, you may also be able to add on additional cover for other expenses, too - such as your household bills or premiums for endowment policies.

When you take out additional cover it may be expressed as a percentage increase against the cost of your monthly mortgage payment i.e. your mortgage payment plus an additional 5%, 10% or 25%.

The example below shows additional cover for a monthly mortgage payment of £1,000:

Mortgage payment (£1,000) + 5% = £1,050

Mortgage payment (£1,000) + 10% = £1,100

Mortgage payment (£1,000) + 25% = £1,250

Remember! The more cover you take out, the more expensive the policy will be.

What is an excess period?

Policies start to pay out after an excess period (the length of time you need to wait after you have stopped work before you’ll receive a payout) and continue to pay out until you return to work or at the end of a fixed period.

Depending on the policy and provider, the excess period will typically vary from 30-180 days with some policies offering ‘back to day one cover’ (essentially removing the excess period altogether).

You can choose the length of the excess period when you take out the policy - the longer the excess period is, the cheaper your premiums will be.

Remember! Your choice of excess period depends on the financial back up you have. Always choose an excess period that won’t cause you undue financial hardship.

What are exclusions?

An exclusion is a circumstance of event - such as a particular cause of unemployment, illness or injury - that can prevent or invalidate a claim. Standard exclusions on MPPI policies usually include:

Voluntary unemployment (inc. voluntary redundancy) or unemployment resulting from misconduct, fraud or dishonesty.
Pre-existing medical conditions i.e. conditions that were diagnosed or treated before the insurance policy was taken out.
Stress or back related injuries or illnesses.
Chronic medical conditions i.e. those that are long term and incurable.

Remember! Always check the policy documents for a full list of policy exclusions.

What about self-employment or non-standard employment?

MPPI is available if you are self-employed or work part time for more than 16 hours per week. Temporary, casual and seasonal workers are not eligible however contract workers are eligible for cover providing there is at least 12 months continuous service with the same employer.

Where can I buy a mortgage payment protection insurance policy?

You can buy MPPI through a financial advisor, bank, building society, mortgage provider or insurance company.

Remember! The cheapest policy may not provide the right level of cover for your needs. By paying a little extra for your insurance it is usually possible to secure better cover and therefore get better value for money.