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Is mortgage protection insurance necessary?

11th April 2018

Mortgage payment protection insurance (MPPI), also known as mortgage protection insurance or simply ‘mortgage insurance’, is potentially one of the most misunderstood insurance schemes out there. Many people confuse MPPI with PPI (payment protection insurance), the widely mis-sold insurance on credit cards and loans that caused a scandal in 2012. Despite this, for some people, MPPI could be a very worthwhile and important consideration. It provides a real safety net for those concerned about what will happen if they lose their job or fall ill to the point of being unable to work.

As it’s such a misunderstood insurance policy, people are often unsure as to what exactly MPPI offers them and whether or not they need it at all. Unlike buildings insurance, which lenders will require you to take out when getting a mortgage, mortgage insurance is not a requirement for homeowners to have. So, what exactly is it? What does it do? And do you need it?

 

What is mortgage protection insurance?

MPPI will cover your monthly mortgage payments during a period where you are unable to work, sometimes for up to two years, but usually for a maximum of 12 months. However, most policy providers will allow you to choose just how much you’d like them to pay out when it comes to making a claim, with a variety of options at your disposal. You could choose to have a provider pay enough to cover your mortgage payments alone, your mortgage payments and bills, or up to 65% of your monthly salary, or £2,000 per month, whichever is lower. Ultimately, it’s a policy that’s in your hands based on your specific needs.

You have a variety of options when taking out an MPPI policy; unemployment only, accident and sickness only, or accident, sickness and unemployment. Unemployment only policies will see the insurance company paying out only if you are made redundant, while accident and sickness will pay if you are unable to work due to an unforeseen illness.

It’s important to note, however, that your policy – whether it be unemployment or accident and sickness based – will only pay out if the reason you can no longer work and keep up with your mortgage payments was unforeseeable. If you know that you could be facing redundancy in the near future, or you already have underlying health conditions that could potentially affect your ability to work, make sure your insurance provider is informed of these to avoid losing out when it’s important.

 

The main reason to take out MPPI

Taking out mortgage payment protection insurance will be beneficial to you if, with your current savings, you would not be able to keep up with your monthly mortgage payments. The need for MPPI rises significantly if you have dependents who rely on you to keep up with mortgage payments.

For the right people, MPPI can be incredibly important, protecting you and your family from losing your home. However, many people may not need it at all due to a variety of reasons, as we’ve listed below.

 

Reasons cover may be unnecessary:

Large redundancy pay:

If you have worked a job for a number of years, upon being made redundant it’s likely that you’ll receive a relatively large redundancy pay. As such, you may not need mortgage payment insurance. However, before relying on your workplace to pay out enough to cover your rent payments, it’s worth enquiring as to the amount you would receive and planning from there. If your projected redundancy pay combined with any savings would cover all of your overheads, including mortgage payments, you could consider taking out accident and illness only MPPI cover.

 

You are entitled to government support:

You may be able to get help from the government with your mortgage if, for instance, you are claiming Job Seekers’ Allowance, Universal Credit or Income Support. If you are in this situation, the government can assist you with your mortgage payments to a degree. However, the most they will pay is the interest on your mortgage, whereas MPPI will cover full mortgage repayments.

 

Substantial sick pay:

Some employees, especially public sector workers are likely to receive very generous pay when off work due to illness or an accident. If this is the case with your workplace, it may be advisable to consider taking out an unemployment only policy, as a precaution in case of redundancy. Although if you are liable to receive a large enough redundancy pay, you may not need MPPI at all.

 

You might be covered anyway:

Sometimes insurance policies you already have will give you almost the same cover you’d get with mortgage insurance. If, for instance, you have permanent health insurance, your insurance will pay you a proportion of your salary if you are prevented from working due to illness. This does not cover redundancy however, and it is usually more expensive than MPPI. Finally, it’s also possible that your work will provide you with some sort of cover, so be sure to check before taking out any form of mortgage insurance.

In conclusion, the key to working out whether you require mortgage payment protection insurance is to summarise your situation. Ask your employer about the possibility of redundancy pay and any potential sick cover, work out if your savings could cover your bills and mortgage if you were to be made unemployed, then you can decide if mortgage protection insurance is right for you.

Looking for more explanation as to what mortgage insurance cover is? Take a look at this post:

Mortgage protection cover – Just what is it?

For more expert information on mortgage payment protection insurance, get in touch with IMC and chat with our friendly team of experts.

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