Insurance to cover mortgage payments comes in many forms, each with pros and cons depending on individual circumstances.
Should you suddenly find that you cannot work, it can be a shock to discover that state help with mortgage repayments is very limited. In fact, all such help is means tested: existing borrowers only qualify for benefit if they qualify for income support. 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. There are several different types of insurance that meet this scenario. The main ones are:
Accident, sickness and unemployment (ASU)
Also known as mortgage payment protection insurance (MPPI). Mortgage lenders often sell MPPI with their mortgages. It is designed to protect mortgage payments if you lose your job, fall ill or have an accident that 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 MPPI policies sold after July 1999 should:
• Provide accident, sickness and unemployment cover
• Pay out after a maximum of 60 days off work
• Provide cover for at least 12 months
• Pay out to the self-employed who have informed the Inland Revenue that they have involuntarily ceased trading and have registered for incapacity benefit.
Income protection insurance (IPI))
Also known in the past as permanent health insurance (PHI). 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.
Most insurers offer a range of deferred periods to choose from. The longer you are prepared to wait for benefits, the lower the insurance premiums.
There are usually restrictions applied to the level of IPI benefit most insurers will offer and the maximum percentage is now between 50% and 60% 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.
Once the insurer has issued the contract, the office cannot cancel it, no matter how many times or for how long claims are made under the contract.
Applications for income protection insurance are subject to underwriting - the process by which insurers decide 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 the 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.
Critical illness cover (CI)
A critical illness policy will pay a lump sum benefit (rather than a regular income) on the diagnosis of one of a specified list of illnesses, or on the permanent total disability of the life assured (usually only where this occurs before age 65). The lump sum payment is made on the diagnosis of specified illness only, regardless of whether that illness prevents the life assured working.
Between them, life offices offer cover for between 30 and 40 different critical illnesses. Every critical illness policy should cover at least the following (noting the particular exclusion of Aids):
· Heart attack
· Surgery for coronary artery disease
· Major organ transplant
· Kidney failure/transplant.
Other conditions commonly covered include multiple sclerosis, paralysis and blindness.
All three 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 protection 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, perhaps combined with critical illness cover.
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 MPPI about their medical history or informed them that pre-existing medical conditions are automatically excluded from MPPI. This feature of MPPI also has an extra complication. Carr points out that MPPI 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. Nicolaou also warns that premiums can increase as MPPI is an annual contract. "It is a cheap alternative if you can't afford anything else," he says.