What is mortgage protection insurance?
Mortgage protection insurance, also known as mortgage payment protection insurance, is designed to cover borrowers’ mortgage payments if they are unable to work due to unemployment, sickness or accident.
In the United States, this type of insurance is usually referred to as ‘loan protection insurance’ or ‘premium protection insurance’.
Mortgage payment insurance policies generally pay a set amount each month for up to two years.
According to UK consumer protection charity Which?, as it only protects the borrower for a limited period, it may not be the best form of mortgage protection available. It advises mortgagors (borrowers) to consider taking out an income protection policy instead.
When taking out a mortgage protection insurance policy, the borrower chooses how much it should pay out each month. In some policies, other monthly bills as also covered.
In the UK, most insurers will let the mortgagor have a maximum benefit of £3,000 per month. If you switch mortgages check the small print, because your mortgage protection insurance policy may not be valid with the new one.
Mortgage protection versus income protection
With income protection, the policy holder knows from the start what is and is not covered. With a mortgage protection insurance policy, the holders will not know the full details of their cover until they put in a claim.
In other words, you really won’t know how comprehensive your mortgage protection is until you need it – this is not the case with income protection insurance.
There is also a waiting period, usually between thirty to 180 days, between putting in a claim and payments coming through. Only ‘back-to-day-one’ policies have no waiting period.
The cheaper policies tend to have longer waiting periods. Experts advise borrowers to take out a policy that covers them as soon as their sick pay ends.
Financial advisers warn borrowers to beware of going to their local bank for mortgage protection insurance, because they are likely to be sold the most expensive ones that don’t give good value for money.
Several reports have shown that nearly half of all people covered don’t really need the insurance. If you became ill but were still able to cover the monthly mortgage installments through your savings, sickness benefits, or your partner’s income, you probably do not need mortgage protection insurance.