Insurance deals covering your ability to keep up with debt are numerous and varied, and their value can also be good or bad depending on your provider. Some forms of loan, like a mortgage, can be particularly important to the holders because if they fall behind they can lose their home, and end up with a big mark on their credit rating for some time to come. This is why mortgage payment protection insurance is offered by lenders, high street insurance companies and independent providers, as it can take away some of the worry of what would happen if somebody could not keep up because they have lost their income unexpectedly.
Because the repayments on a home loan can often be the single biggest expense someone faces, it may be the loan they are most interested in protecting with an insurance policy. A deal they get is likely to be classified as a payment protection product, but this kind of cover comes with many names, including mortgage cover, mortgage protection, and mortgage payment protection insurance, sometimes shortened to MPPI.
The payment protection insurance part simply refers to a large and varied collection of financial insurance policies which provide short-term financial support for anyone struggling to pay a debt, typically because they have lost their income through something which was beyond their control. This normally includes redundancy, illness, and injury after an accident.
The mortgage variation of this is simply a deal which is specifically designed to provide cash support with a home loan only, and is different to broader income protection plans, for example, which provide lump sums for general expenses as a proportional replacement of your income.
Some people may have been offered mortgage insurance at the same time they took out a home loan, and selling in this manner has come in for criticism and developed as a controversial subject. Early in 2007, the Financial Services Authority fined a number of well-known loan providers which were found to have been mis-selling payment protection policies. This included selling this form of cover to people who would not be able to claim and this included those who were employed part-time. Some high-profile providers have also been known to coerce people into taking out this form of insurance, perhaps at an inflated price.
Shop around
It’s important to stress that is up to you wear your mortgage cover comes from, it does not have to be supplied by the company providing you with a home loan, and you are free to turn down their offer of insurance but look for an alternative cover plan from another provider elsewhere.
Mortgage payment protection insurance would pay out a set amount each month after a successful claim and this can often be outlined by you. So you might be able to simply name an amount you would like protected and the insurance company would supply you with a premium accordingly. However, no provider will insure an indefinite amount of money towards a home loan, and there will be a cap beyond which you cannot get any more cash. So for example a company may be willing to pay no more than £1,500 per month or half your normal earned income.
Once you have successfully claimed the payouts continue to be made either until you are back working again or the policy payout period expires, whichever comes sooner. While many providers offer deals up to 12 months, others also do cover plans up to 24 months, although you can typically expect to pay more for a product which has a longer payout period. So a deal which guarantees payouts for up to 24 months and has a payout level of £700 a month may be more expensive than a deal which would pay out £800, but only for a maximum of 12 months, for example, so although one provides more on a monthly basis, the other is a little more expensive because it could provide payments for up to two years.
Although insurance companies typically look to process and sort out claims smoothly and quickly, they do not usually provide the first payout immediately after a claim is successful. This because most insurance deals covering a mortgage have the kind of exclusion zone which must pass before a first payout arrives. In many ways this acts like an excess on a car insurance policy. However, you can often choose how long you would have to wait before the first payment towards your repayment arrives. This is typically either 30, 60, or 90 days and the longer you agree to wait, the cheaper your premium might be.
So we have a number of factors which will decide your premium - the amount of payout you want towards the repayments each month, how long you would want repayments to go on for, how long you’re prepared to wait before the first one arrives, and the level of deal an insurance company is willing to provide you with. All of these things will affect the eventual premium, although it is possible to get a deal which only costs a few pounds per £100 worth of protection.
This kind of cover is also available in different levels though, and this relates to the circumstances which you are protected against. So you may be most worried about struggling with your repayments because of redundancy in future. A lot insurance companies will allow you to simply take out a mortgage payment protection insurance plan which only covers against redundancy, or only covers against illness, for example. You may well pay less for a deal which has a more narrow list of pay out eventualities.
Mortgage payment protection insurance not only provides a financial helping hand, it can also be a psychological buffer as too many people their home is the most important possession, and the thought of losing it is very difficult to bear. Of course, while many people may be fairly comfortable, they are probably aware that involuntary redundancy or a long-term illness which sees them unable to work for a long period can see them stripped of their income. This is why a straightforward insurance plan, effectively running in the background, can provide valuable peace of mind even if you never have to use it.
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