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Mortgage Protection Insurance Explained

The term Mortgage Protection Insurance encompasses various types of cover. Each one protects borrowers from events which could severely impact their ability to maintain mortgage payments.

The different variations usually fall into the following categories when connected to a mortgage:

  • Life Cover
  • Critical Illness Insurance
  • Income Protection
  • Family Income Benefit

Life Cover

As a rule, if the policyholder dies within the term, the outstanding mortgage balance should be paid off by the sum assured. It should also ensure the borrower’s dependents aren’t left with a debt they might not otherwise be able to manage.   

Our advisors can run through all the different types of life cover and recommend the most suitable plan for you.

Critical Illness Insurance

Critical Illness Insurance works in a similar way to Life Assurance. Usually, it covers a specific term and has different options. Like Life cover, for borrowers, it is typically on a decreasing term basis in line with your mortgage balance. The structure also means it can pay out a lump sum.

The key is that the benefit is paid if you fall victim to one of a number of specified critical illnesses and pays out whatever the long-term prognosis of that illness. The type of illnesses covered vary from company to company. That’s why this type of insurance cannot be solely price-driven and advice is recommended.

In practice, many companies will offer Life and Critical Illness Critical cover as a combined policy. They will also usually payout on the “first event” i.e. whatever happens first – either death or serious illness. They are also used for a single or joint life basis.

Income Protection

Whereas Life and Critical Illness cover pay out a lump sum, Income Protection pays out a monthly sum. This will replace your wages in the event of you being unfit to work. Unlike Critical Illness cover, there are no restrictions on the illnesses or injuries covered. The only factor being whether they make you unfit to work. There are however restrictions on how much you can cover and how quickly benefits would start to be paid.

Like Life and Critical Illness cover, these policies are underwritten based on your health and lifestyle at the time you apply. All income protection policies are written on a single life basis.

Family Income Benefit

This is probably the least common of the mortgage protection type policies. However, it can often be valuable, particularly for those with young families. These plans can be taken to cover Life and/or Critical Illness and are underwritten on application in the same way as mentioned above.

Rather than pay out a lump sum, this cover would pay an annual or monthly income for the remainder of the term of the plan. Thus, it can replace the income of the main breadwinner for a number of years, dependent upon a particular client’s circumstances. Because of this, it would usually be written on a level or basis, or an index-linked basis designed to keep up with inflation.

Summary

There’s an adage that says you can never have too much insurance. Certainly, many people have one or more of the different types of policy and it would be wrong to think of Mortgage Protection Insurance as just an “either/or” choice. However, in the real world, affordability plays a massive part. So, whilst it would be fantastic to cover yourself for every potential opportunity, a good advisor will sit down with you and tailor the type of cover to be the most suitable combination to your family’s priority and budget.

This is where we can help! 

Please give us a call or fill out our enquiry form to speak with one of our Dedicated Protection Specialists.

 

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