Mortgage protection: protecting the biggest purchase of your life
Mortgage Protection life insurance covers the amount of your mortgage loan and ensures that if you die your mortgage can be paid off immediately and your family or dependants can keep a roof over their heads.
Your life cover will need to provide level or decreasing cover depending upon the type of mortgage you have. A level policy provides the same amount of cover over the full term of your mortgage and is most commonly used with interest only mortgages. A decreasing policy provides cover that reduces as your mortgage loan is paid and is used with repayment mortgages.
If you require a mortgage protection policy with level cover this is known as Level Term Assurance. This is explained in our Term Life Insurance guide.
How does the policy work?
- You decide on the amount of cover you need, this is called the ‘sum assured’.
- You can take out cover on your life or add your partner as a joint life policy.
- With a joint life policy the sum assured is paid on the first death or on diagnosis of a terminal illness if this option is included in your policy. Most policies now include terminal illness benefit so if you are diagnosed with a terminal illness the policy will pay out while you are still alive.
- The cover guarantees to equal the amount of your mortgage assuming that a maximum mortgage interest rate is not exceeded over the policy term. This is usually between 10% and 15%. If interest rates remain above the maximum for a long period you should review the level of cover.
- The insurance amount will be paid to the beneficiaries of the policy or your mortgage lender if the policy is to be assigned.
- Make sure your policy lasts for the same term of your mortgage.
- If your policy is to protect a Repayment mortgage, the cheapest type of cover is reducing mortgage protection. Because the amount of cover reduces over time, the monthly premiums are considerably cheaper than level term protection.
- If you require reducing cover check the maximum mortgage interest rate covered. Most protection policies will only guarantee to repay your mortgage up to a maximum rate, usually between 10% and 15%. The higher the rate covered the more protection you would receive against times of high interest rates.
- Because you are using the policy to cover a loan or mortgage, there is no need to inflation link your policy. For all other types of policy it is ideal to index them because, if you need to claim, you need the cover to have kept its real value over time.
- Check that the premiums are `Guaranteed´. This means the premiums are guaranteed to remain the same throughout the term of your policy. This is opposed to `Reviewable´ premiums which, as the name suggests, are reviewed usually every 5 years and can increase dramatically.
- Can waiver of premium benefit be included in your plan. This is a valuable extra which, if you become too ill to work for a number of months, will ensure your cover continues without you having to pay the premiums.
Common Policy options
You can include one or more options to improve the level of protection provided by your policy. Adding any of these options will increase the premiums.
- Waiver of Premium
If you are unable to work due to illness or injury, your insurance company will continue to pay your premiums and keep your cover in force.
- Critical Illness Cover
The insurance benefit will be paid if you are diagnosed as having a critical illness covered under the policy.
Content by Robert Prime