Mortgage Protection Unemployment explained

Since total unemployment figures had been falling steadily for the previous 15 years, many people could be forgiven for being lulled into a false sense of security about their jobs. Between March and August of 2008, however, the jobless trend took on a somewhat alarming reversal, as more and more companies were forced to respond to the widening effects of the credit crunch by shedding jobs. And that is why mortgage protection unemployment cover can be a lifeline to those who face involuntary redundancy.

Quoting a senior official of the Bank of England on 3rd September 2008, the Guardian newspaper reported that unemployment could rise by 60,000 each month and reach a total of 2 million jobless by the end of the year. Although one of the hardest hit job markets has been in the construction industry, following the dive in property prices, even more companies appear to be reducing payroll expenditure by enforcing redundancies. Moreover, such redundancies are in both unskilled and skilled sectors of the labour market.

Mortgage Protection Unemployment from Burgesses

The worrying trend, therefore, is to more unemployment and insecurity even in those jobs that previously seemed entirely safe. For anyone with a mortgage, of course, this is especially bad news. As spiralling prices and an ever more expensive cost of living, most people are already struggling to pay the bills. If redundancy strikes and the regular income is lost, it could well nigh impossible to find the resources to pay the mortgage each month. Although any meagre savings could be used to bail out the homeowner for a short period of time, the time is likely to come when some mortgage repayments get missed. And then, before too long, the home itself becomes at risk.

Given such alarming prospects, therefore, more and more people are preparing for the worst by arranging mortgage protection unemployment cover. In return for what can be a surprisingly modest monthly premium, in today’s uncertain economic climate, this is a very sensible precaution. The protection works in a very simple and straight forward way. Also known as mortgage payment protection insurance (MPPI), in the event of the policy holder becoming involuntarily unemployed, the insurance pays a monthly benefit that is calculated to cover not just the mortgage repayments but the associated costs of any mortgage life insurance, along with the buildings and contents insurance of the policy holder’s home.

Mortgage payment protection insurance is generally packaged together with cover for the additional risk of a loss of income through incapacity to work because of accidental injury or illness. However, mortgage protection unemployment alone can just as easily be arranged and, of course, the premiums are even cheaper (roughly a half of those for the complete package).

Mortgage Protection Unemployment

There might be a number of reasons for choosing just unemployment cover. Some people might consider themselves sufficiently fit, healthy and careful not to need the accident and sickness benefits, or they might consider the complete package of accident, sickness and unemployment insurance beyond their current means and so opt for just the unemployment cover. Mortgage protection unemployment might also be the choice for those employees who enjoy adequate incapacity cover through their employer’s own company scheme.

It could be argued that mortgage protection unemployment cover is unlikely to be required by those employees who are members of generous redundancy schemes negotiated by their trade union or staff association at their place of work. It is true that some redundancy schemes offer quite handsome settlements, but it would obviously be wise to establish just how much is likely to be paid in any individual circumstances, rather than leave it to the final moments of redundancy.

One source that is unlikely to provide enough of a safety-net in the event of redundancy is the government. Whatever many people might have thought about the extensive help offered by the Welfare State, when it comes to redundancy it is unlikely to provide much in the way of protection for most mortgage borrowers. Currently, no assistance at all is available until the individual has been involuntarily unemployed for several months – and, clearly, in most cases the damage has already been done by this stage. Even then, however, those mortgage borrowers who qualify for State assistance will only be able to claim for help in repaying the interest due on the mortgage and nothing at all towards the principal amount borrowed. Furthermore, such State assistance is limited to the first £100,000 (from April 2009 it will be £175,000) of any mortgage and borrowing above this limit attracts no help at all. No assistance is provided by the State to help cover the costs of mortgage life insurance or the buildings and contents insurance on the home. Currently, if there is a partner or spouse who regularly works more than 16 hours a week, or if the claimant has more than £8,000-worth of savings, currently no State aid at all is payable.

Employers who decide to introduce compulsory redundancies are also obliged to pay statutory redundancy pay. Perhaps this would be sufficient to cover the mortgage until alternative employment can be found? Once again, unfortunately, this is unlikely to be the case. The rules concerning minimum levels of statutory redundancy pay offer little in the way of support.

Under current legislation, to qualify for statutory redundancy pay, the employee must have worked under a contract of employment with the relevant employer for at least 2 years before the redundancy. A one-off, lump sum payment might then be paid. This is based on the current, regular weekly pay and varies according to the length of service with that employer and the age of the employee. Thus, an employee aged less than 22 years of age will qualify for half a week’s pay for each complete year of employment with that employer; someone aged 22 but less than 41 will receive one week’s pay for each complete year; while someone over the age of 41 would receive one and a half week’s pay for each complete year of service.

So, it probably does not take much working out to see that for most people, statutory redundancy pay would fail to bring in enough to cover mortgage repayments throughout the period it takes to find and secure a new job. Mortgage protection unemployment cover, on the other hand, would almost certainly provide enough for even quite sizeable mortgage repayments – can keep paying out for up to 12 or 24 months (depending on the type of cover chosen). Many such policies will provide cover up to 65% of the policy holder’s normal, regular salary or £3,000 each month, whichever is the lower figure. In the vast majority of cases, of course, this would provide more than adequate protection and comfort in the knowledge that the mortgage will continue to be paid until alternative employment can be found.