Mortgage Protection Cover Explained

Put at its simplest, mortgage protection cover is just what it says – it protects a mortgage. Why does a mortgage need protection? Once again, the simple answer is that a mortgage needs protecting because if it is not paid, the lender can apply to the courts for repossession of the property itself. With the risk of losing their home, therefore, the surprise is that more people do not arm themselves with mortgage protection cover.

The insurance that helps to ensure that the mortgage repayments are maintained works on a very straight forward principle. This recognises that difficulties in keeping up mortgage repayments are most often encountered when there is a sudden and unexpected disruption of a normally steady salary from employment or self-employment. Typical of such a disruption is the incapacity to work because of injuries sustained in an accident or the need to recover from an illness. A second reason can be an unexpected, enforced redundancy. Incapacity or unemployment can, therefore, lead to several months off work and, more critically, the loss of the income that such employment normally returns.

Mortgage protection cover – or mortgage payment protection insurance as it is also known – guarantees a monthly pay out in the event that the policy holder is off work through accident, illness or involuntary unemployment for longer than a given qualifying period (typically, this is 30 days, although some policies will insist on an incapacity or unemployment period of 60-90 days before the benefits become payable).

Mortgage Protection Cover from Burgesses

To ensure that a mortgage is adequately protected, therefore, it is simply a question of deciding in advance how much cover is required and paying the related monthly insurance premium accordingly. Naturally, there is a ceiling on the maximum amount of cover that can generally be arranged in this way but it is generally more than adequate to cover the great majority of mortgages. When calculating the amount of mortgage protection cover required, it is also possible – and naturally most prudent – to include the monthly costs of mortgage-related life insurance premiums and the buildings and contents insurance of the home.

In the event of the policy holder then needing to be off work for longer than the agreed qualifying period, the mortgage protection cover kicks in and benefits become payable up to the insured amount each month. Although all policies will have a minimum qualifying period before the benefits become payable, it is worth noting that some of the better value policies nevertheless then backdate these benefits to the first day on which the policy holder was absent from work. Other policies, however, effectively treat that first month (or whatever qualifying period may apply) as a type of policy “excess” to be borne by the policy holder him or herself, with the benefits paid only from the first day after the qualifying period has been completed.

Mortgage Protection Cover

From the outset, it is important to remember what mortgage protection cover is designed to do – to provide mid-term protection of mortgage repayments, when a normal, regular income is disrupted, pending an eventual return to normal working. In practice, therefore, the protection is provided long enough for the policy holder to recover from any accidental injury or sickness, or to find alternative employment if he or she has been made compulsorily redundant. What this means is that the benefits payable under most policies are either until that return to work or for up to a maximum of 12 months, whichever is the sooner. Some policies extend this maximum period during which monthly benefits will be paid for up to 24 months – but, of course, the premiums for such a relatively long period of benefits will also be higher.

While mortgage protection cover thus provides an essentially temporary solution to paying the mortgage even when incapacitated from working or involuntarily unemployed for a while, it in fact covers the most commonly encountered difficulties that arise with mortgage repayments. Certainly, without such protection, and even if the period of time off work or out of work is only for several months, many homeowners would find it next to impossible to meet their mortgage repayment obligations. Missed payments on the mortgage would then adversely affect the homeowner’s credit rating, making it far more difficult to obtain any form of credit or other borrowing in the future. Even worse, of course, is the prospect of these missed payments being symptomatic of more serious financial difficulties. If a short-term default leads on to longer-term difficulties in making up the shortfall, then of course the home itself is at risk of the mortgage lender’s action to repossess the property.

Thinking of the longer term, in fact, some people might consider a maximum of 12 – or even 24 – months too short a period to arrange adequate protection for their mortgage. The alternative, in such a case, would be income protection insurance, which again pays a monthly benefit in the event of injury or illness and could be used to ensure that mortgage commitments are met. The advantage with this type of insurance is that there is no maximum period over which the benefits are payable and they continue to pay for as long as the injuries or illness persists, until the conclusion of the insured term which is frequently written to coincide with the policy holder’s retirement.

There are marked differences with this type of insurance, however, and unlike mortgage protection cover, it does not provide any protection against the risk of involuntary unemployment. Furthermore, given the potentially indefinite period for which benefits would be payable, insurers will want to know considerably more about the health, lifestyle and occupation of the insured when arranging income protection insurance.

In many cases, therefore, income protection insurance can prove considerably more expensive than mortgage protection cover (and it will never cover the risk of unemployment). Since temporary and relatively short-term absences from work through accident, sickness or unemployment are likely to pose a more frequent risk, therefore, readily affordable mortgage protection insurance can offer the better value for money.