Mortgage Payment Insurance and Income Protection Insurance - tailored to your needs

Many homeowners assume that if they could not work, the Government would provide a safety net to ensure they would not lose their home. Sadly, they often discover too late that state help with mortgage repayments is very limited.

In fact, help with mortgage repayments is means-tested: existing borrowers only qualify for benefit if they qualify for income support. Anyone with more than £8,000 in savings will receive nothing. If you are lucky enough to obtain assistance, the government will only pay your mortgage interest, not the capital element of repayments. Also, if you took your mortgage out after October 1995 there is no help for the first nine months of unemployment or disability.
It is essential, therefore, for anyone with a mortgage on their home to take out some form of private insurance to protect their mortgage repayments if they were unable to work.

Andrew Dennis, protection specialist at Insure You says: ‘Four things would stop you being able to pay your mortgage: death, being off sick with the chance of recovery, being off sick without the chance of recovery, and redundancy.’ While only those with financial dependants need take out insurance to pay the mortgage if they die, all mortgage holders need to consider what would happen if they fell sick or lost their job. There are several different types of insurance that meet these scenarios.

The main ones are:

Mortgage lenders often sell mortgage payment insurance with their mortgages. It is designed to protect mortgage payments if you lose your job, fall ill or have an accident, which prevents you from working. The exact details of the policies vary between providers, but under minimum standards laid down by the Council of Mortgage Lenders and the Association of British Insurers, all mortgage payment insurance policies sold after July 1999 should:

An income protection insurance policy is designed to replace your lost income if you are unable to work, due to illness or accident, for more than a specified period of time. Benefits do not start to be paid until you are unable to work for a period longer than the deferred period under the contract.

Once the benefits have started to be paid, they will continue until you return to work, die or reach the retirement age specified in the contract.

There are usually restrictions applied to the level of income protection insurance benefit most insurers will offer and the maximum percentage is now between 50 per cent and 60 per cent of earnings. This restriction is not enforced by legislation but is widely adopted by almost every insurer, because they want to make sure that benefit claimants have a financial incentive to return to work.

Applications for income protection insurance are subject to underwriting – the process by which insurers decided whether to accept an application and the terms on which the application should be accepted. Your occupation will have a great impact on your application for income protection insurance.

Higher premiums are applied to occupations seen as producing an above-average risk to health of employees. It used to be the case that manual jobs were considered high risk, but these days professions such as teaching are at the upper end of the risk scale due to the level of job-related stress.

Both types of insurance can play a valid role in protecting mortgage payments. However, you should bear in mind that there are great differences in the cost and quality of products. Mortgage payment insurance can be very expensive, particularly if you buy it from your mortgage provider, and you should remember that it only pays out for a year. Most people would be better off taking out income protection insurance, which provides cover for long-term incapacity until retirement.

Richard Mason, director of Insuresupermarket.com says: ‘Mortgage payment insurance is often thought of as being much more expensive than income protection insurance, often because people take this insurance out directly from their lender, which can be expensive.

‘But by shopping around and buying from an independent insurer, consumers can usually get a much better deal than from their lender, which makes mortgage payment insurance much better value for money than it currently seems. On insuresupermarket.com, consumers can compare over 100 different mortgage payment insurance policies in one go to ensure they find the best deal for their circumstances.’

According to Rhino Insurance, the average cost of mortgage payment insurance from the major lenders is almost £6 per £100 of cover, which is double that charged by some independent providers.

Dennis believes mortgage payment insurance is relatively competitively priced but warns that the definitions are quite restrictive. For example, not all policies have ‘own occupation’ definition’. This means that you have to be unable to do any job at all, not just your own one, before the policy will pay out. He also emphasises the time limits on benefit payments. ‘What happens if you are still ill after 12 months? Mortgage payment insurance just gives you a breathing space,’ he says.

Kevin Carr, senior technical adviser at Lifesearch, points out that a mortgage payment insurance contract excludes existing ailments or conditions. He also warns: ‘Mortgage payment insurance policies often exclude stress and back problems automatically – the very conditions that account for the biggest proportion of claims.’

You ought to be told this by the provider when you take out the insurance. However, shockingly, in a survey by Rhino Insurance, only one lender asked applicants for mortgage payment insurance about their medical history or informed them that pre-existing medical conditions are automatically excluded from mortgage payment insurance. This feature of mortgage payment insurance also has an extra complication. Carr points out that mortgage payment insurance is an annual policy, which means that if you make a claim for sickness, when you renew you will not be covered for the ailment already suffered. Dennis also warns that premiums can increase as mortgage payment insurance is annual contract. ‘It is a cheap alternative if you can’t afford anything else,’ he says.

Carr believes income protection insurance is usually a better option for most people. However, he says mortgage payment insurance is sometimes suitable, particularly if someone has a history of health problems which means they would find it difficult or expensive to get income protection insurance. ‘Mortgage payment insurance is more affordable if income protection insurance is going to be expensive,’ he says.