Mortgage Protection Insurance
Mortgage protection insurance (or mortgage payment protection insurance MPPI) is a specific type of decreasing term insurance designed to at least cover the costs of mortgage repayments if the policyholder loses their income from illness or redundancy during the mortgage term. This bespoke product ensures that the policyholder's mortgage payments are made in full for usually up to 12 months to avoid the financial burden for house repayments passing to family members. More in depth policies will also cover bills relating to the policyholder's mortgage.
As stated above, mortgage protection insurance is a type of decreasing term insurance. The policy is taken out for a period equal to the duration of the mortgage (i.e. 25 or 30 years usually). It pays out the required monthly premiums for the designated time. Therefore, the potential pay out will decrease each year as the outstanding capital on the mortgage decreases.
Mortgage protection insurance is not a compulsory part of taking out a mortgage, but as a home loan is likely to be the biggest financial commitment in an individual's life, it is strongly advisable to consider such coverage. This is particularly pertinent in the current climate of high house prices and the need for many buyers to stretch their finances to secure their mortgage. With many mortgage lenders calculating loans based on 10 times the average income, mortgage protection is more than ever an important consideration when committing to a huge loan to secure a home.
It must also be noted at this point that, while mortgage protection insurance is not compulsory across the board, many mortgage lenders are now making it a requirement when taking one of their home loans. With repayment defaulting on the rise, many lenders are insisting on the coverage to safeguard their own financial health.
Most mortgage lenders also offer mortgage protection insurance and many will push for the customer to bundle their payment protection coverage in with their mortgage. However, customers should shop around to get the best deal. Mortgage protection insurance, like most insurance products, can be taken out as a stand-alone policy, so homeowners are not obliged to take cover with their mortgage provider.
As in most commercial sectors, shopping around will ensure the customer finds the best deal and, in most cases, bundling in their mortgage protection insurance with their mortgage provider is not the best deal on offer. However, the financial bottom line is not always the most important long-term consideration. There is something to be said for being a good customer to a mortgage provider as good customers are likely to receive better deals on new products in the future. Customers need to balance their needs.
As stated above, most mortgage protection insurance policies will cover the policyholder's monthly repayment commitments for up to about a year. A good policy will start to pay one month after the policyholder leaves work. However, some do not kick in until two months after the policyholder stops receiving their wages. This difference may seem small but can be highly significant to an individual or family's finances, so mortgage protection insurance customers should check the fine print to see when their chosen policy starts to pay out.
Finally, mortgage protection insurance may not be the best fit for all. In some cases customers should consider income protection insurance. This cover is similar to mortgage protection insurance as it pays out if the policyholder cannot work. However, it is not limited to covering the costs of a mortgage. It provides a replacement to the policyholder's lost income.