Your mortgage is probably your biggest monthly outgoing. If you were unable to work due to illness or redundancy, you'd still need to make repayments or risk losing your home.
There are two main options: you can either take out protection insurance specifically to cover your mortgage payments or get general income protection insurance (where the payments you would receive could be used for anything).
Mortgage payment protection insurance (MPPI) allows you to continue paying off your mortgage if you're no longer receiving a secure income.
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There are three types of mortgage payment protection insurance – unemployment only, accident and sickness only, and accident, sickness and unemployment.
Insurers will pay you a set amount each month, typically for a period of up to two years.
Depending on the provider, you may be able to choose how your policy will pay out.
For example, you might want the policy just to cover the cost of your mortgage payments or you may want it to cover the cost of other bills, too. If you opt for the latter, providers will typically pay out 125% of your mortgage costs.
You can also choose to base the cover on your salary. Providers will typically pay out up to 50% of your monthly salary.
If you're off sick for longer than two years, MPPI may not cover all of your needs, so an income protection insurance policy may be more suitable.
Before claiming, you will need to be off work for a specified number of days. This is known as the waiting period, or excess period, and it can range from 30 to 180 days.
The longer the waiting period, the cheaper the policy is likely to be. So if your employer offers sickness benefits , or you have some savings you could rely on for a few months, you may want to take out a policy with a longer waiting period.
Your job or the type of employment contract you have may affect the policy you can get. Most insurers will categorise jobs in different risk categories. Below is an example of how insurers may classify your job's risk level, with Class 4 being the highest risk.
Most providers will now cater for self-employed people, but read the small print carefully to check you're not exempt – for example, if you're on a casual or fixed-term contract.
It's highly unlikely that your mortgage insurance policy will cover you from the moment you take out the policy. In fact, it may be a few months before you're able to claim.
The time between your policy beginning and you being able to claim is known as the exclusion period (or buffer period), and these can vary from 30 to 180 days.
Unemployment cover is likely to have a longer exclusion period than accident or sickness cover. This is to stop people who know they're going to be made redundant from taking out policies.
Despite most policies paying you from when you claim, it's also possible to get policies that will pay out from the first day you're off work. These are known as back-to-day-one policies. They will typically be more expensive than policies with a waiting period.
All policies will pay you in arrears, though, so whether or not there's a waiting period, you'll receive your first payment one month after your claim is accepted.
If you've experienced health problems in the past 12 months, this is likely to affect your ability to get mortgage payment protection insurance.
Some policies will provide no cover at all for pre-existing medical conditions, whereas others have strict criteria.
For example, you won't normally be able to claim for time off due to a pre-existing condition if it recurs within 12 or 24 months (depending on the policy) of taking out the policy.
Also, if you have an issue with your back, you may find it tricky to claim – you may need to provide radiological evidence before your insurer will pay out.
There will be other medical exclusions and conditions, too, which you should check carefully before taking out a policy.
Despite mental health being a common reason for needing time off work, you may have some difficulty claiming on your policy and insurers may require evidence that your mental health means you can't work.
Although they may sound similar, mortgage payment protection insurance is not the same as payment protection insurance (PPI).
While PPI covers unsecured finance and payments are made to the lender, mortgage payment protection insurance only covers mortgage payments and is paid directly to you.
Crucially, both policies are designed to cover a single debt, but won't cover other payments, such as council tax and utility bills, you might be unable to meet if you were off sick.
Before you take out a mortgage payment protection policy, it's worth thinking about whether other forms of insurance may be better suited to your needs.
Income protection a proportion of your salary if you can't work because of an accident or sickness. Some income protection policies pay out for a longer period than mortgage insurance, for example until you can go back to work or reach retirement.
Income protection is a more effective way of insuring against ill health than mortgage payment protection insurance, as you're medically assessed when taking out the policy and will know in advance what you will and won't be covered for.
However, it also tends to be more expensive than mortgage payment protection insurance.
Critical illness insurance pays a lump sum if you're diagnosed with a serious illness, but it won't provide a regular income.
Life insurance isn't really an alternative to mortgage payment protection, for the simple fact that it only pays out when you die.
But it's worth considering if you have dependents as it will pay out a lump sum in the event of your death. You can opt for the lump sum to be enough to cover the cost of your total outstanding mortgage debt.
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Before you take out any new protection insurance, check whether there are any arrangements already in place with your employer.
Some companies will continue to pay your salary, or a proportion of it, for a set period if you need to take time off due to illness.
You may also be covered by income protection insurance from your employer.
If you become unemployed, you may be able to get state benefits such as jobseeker's allowance or employment and support allowance.
If you're eligible for these benefits, you may also be able to apply for a support for mortgage interest (SMI) loan.
Under the scheme, your lender will receive payments from the government covering all or part of the interest on the first £200,000 of your mortgage at the Bank of England's published monthly average mortgage interest rate.
The loan won't cover your capital repayments, though, and you'll need to pay off your SMI loan with interest if you sell or transfer ownership of your home.
If the sale of your home doesn't cover the entire cost of your SMI loan, any remaining loan will be written off. Visit gov.uk
for more information.
Find the best mortgage for you, with expert help provided by L&C Mortgages
Find the best mortgage for you, with expert help provided by L&C Mortgages
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