What are your plans for keeping up with your monthly mortgage repayments in the event of involuntary redundancy, accident, or prolonged illness? If you are like many people, you may not have a plan. Perhaps your plan is to rely on the State to provide assistance. Be aware that the restrictions to get support from the government are very tight and the support is usually very little. You have to take charge of your own situation with the purchase of mortgage protection, or one of the other common types of payment protection insurance (PPI).
Payment protection insurance is an umbrella of insurance products that includes three common types. Mortgage protection (or mortgage payment protection insurance - MPPI) is designed to help you keep up with monthly mortgage payments. Loan protection is a product that helps you meet your debt obligations, including personal loans and credit card balances. Income payment protection is basic replacement income that enables you to keep up with monthly financial responsibilities in lieu of lost job income. Despite some subtle differences, each payment cover replaces your lost monthly income when you are out of work for one of the covered events.
Mortgage protection policy benefits
Mortgage payment cover varies somewhat from one provider to the next. The basic components of the products are similar, but some modest discrepancies in terms and conditions can play an important role in your cover. The first thing to consider is how long you want your cover to run. Typical plans run for 12 months, though there are some providers that offer protection that pays out benefits for 24 months.
Another factor that you need to contemplate when selecting the best plan is when payments kick in. Some plan offer benefits that begin 30 days after the insured event. Others policies begin benefits payments 60 days or 90 days after the covered event. Can you afford to wait for 60 or 90 days to begin collecting your replacement income? Perhaps if you have some savings or additional sources of income, you can. Otherwise, you may decide to stick to policies that begin payments at 30 days.
It is up to the insured to choose how much cover is the right amount. Some people want to take the maximum cover allowed for complete protection. Others may decide to save on premium costs by taking on less cover if they have other sources of funds. The maximum monthly benefit is typically £1,500 or half of your gross normal monthly income, whichever is less. The payments are tax free which makes the net pay more significant.
Mortgage protection eligibility
To be eligible to collect benefits on a mortgage payment insurance policy, you must have been employed full time for six consecutive months. Part time employees, retired people, and those with pre-existing medical conditions are typically not eligible to receive benefits under the terms and conditions of the payment protection plans. This has not stopped financial institutions from selling policies to these unprotected groups. Mis-selling was rampant in the industry for many years before a 2005 Citizen’s Advice super complaint and an investigation by the Financial Services Authority (FSA) brought the practices to the attention of the public and government agencies. Be sure to know before being approached by a seller whether you are eligible.
Covers available with mortgage protection
There are basically two elements of cover available under the typical payment insurance policy. Accidents and sickness cover (also called incapacity cover), and unemployment insurance are the two common covered events. This is why the insurance is often referred to as ASU insurance. Consumers have the option to buy policies that offer broad protection against these events. You can also protect against one if that suits your needs better.
Some people that have solid accident and sickness protection through their employer may not want to pay for the insurance in the open market. Similarly, some people may decide they do not need cover against unemployment, but they want it for accident and illness. If you are confident in your ability to quickly gain employment after involuntary redundancy, you might get by without unemployment protection. Most people would likely want this cover, though.
An additional benefit that many people might like to add to their mortgage protection is carer cover. This add-on protection - which is often offered as standard by some providers - pays benefits when you are forced to leave work to care for a sick or injured family member. It can be stressful to balance managing a job while caring for a close relative who is seriously ill or injured. This add-on benefit helps relieve that stress by making replacement income payments at the point benefits kick in.
Getting the best deal for mortgage insurance
There are essentially two providers of payment cover. Financial institutions have long controlled the industry by selling their expensive premiums to consumers that were unaware of their options. Banks would pressure borrowers into buying insurance protection with new loans. Some would even deceive them by adding premium costs to the loan repayments to spread the costs out over the course of the loan repayment. They would hide the details in the fine print of disclosure documents.
In 2007, the FSA concluded its investigation of the payment cover sector by issuing fines against many of the known banks on the high street. This forced these companies to rethink their selling practices. It also made consumers more aware of the ability to find better deals on payment insurance on the open market from independent insurers.
Independent insurance specialists offer mortgage protection insurance that is generally about four times less expensive than what financial institutions sell it for. Their income protection policies are about five times less expensive. Loan payment cover is about ten times less expensive. Along with more affordable rates, insurance specialists also offer industry expertise and support to customers. It is quick and easy for consumers to shop around and compare the terms and conditions of various policies before selecting the best one. This competitive market has been beneficial to the industry. Financial institutions must now cope with a mandatory seven day waiting period that the Competition Commission instituted to prevent the pressure selling tactics of old, giving consumers more choice when it comes to getting the right mortgage protection for them.
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