Mortgage Protection

What is mortgage protection insurance and how does it work?

There are actually different answers I could give about mortgage protection insurance. Most people think of life insurance, to pay off the mortgage if you die. But another way of looking at it is that mortgage protection insurance could help you pay the mortgage payments if you’re unable to work due to illness, injury or redundancy.

When we talk about mortgage protection insurance, we’re considering a range of products that are there to help you and your family not only pay your mortgage but get through any challenging times in your life.

What are the different types of mortgage protection insurance available in the UK?

There are three to four major ones that we talk to our customers about. The first one which everyone considers is life insurance. Life insurance provides you with a lump sum of money if you were to die. That then goes to your partner, your family – whoever you want to leave it to.

Then you have critical illness cover or which again provides a lump sum of money if you are diagnosed with a serious illness. According to Legal & General’s claim statistics in 2022, over 60% of all claims on critical illness policies were for cancer related issues. It’s huge for that.

You’ve then got income protection, which provides you with an income on a monthly basis if you can’t work due to injury or illness. That works very differently. We obviously have statutory sick pay in the UK and we potentially could have benefits from our employer to pay us for a certain period of time. But potentially that won’t run for the full length of your mortgage or for the full length of your injury or disease.

There’s also a product called family income benefit. It’s quite like life cover. If, for instance, I were to die, my life cover lump sum goes to my wife and family and that pays off our mortgage debt. But what’s also happened is that my income is gone. So family income benefit replaces that income for you. It means my wife would receive money on a yearly basis to supplement what they’ve lost by me dying.

Family income benefit tends to relate to children – a lot of the policies run until the children are 18 or 21. There are obviously quite a lot of other products that we could include, but these are the major ones that we talk about with our mortgage customers.

What are the benefits of having mortgage protection insurance?

It’s reassurance. You’re reassured that you’re not going to be financially impacted straight away if something happens, if someone becomes ill or dies.

And, sorry Michelle, but if she died, I at least know that there is going to be a lump sum of money to help me pay off the mortgage and maybe other debts. Maybe there’ll be a bit of income there for me and the children and that’s obviously going to be a huge benefit.

If you develop a critical illness, what does that look like? Are you going to have to take time off work? Will you actually even be able to work? What will your employer offer in terms of your sickness benefits?

Generally there’s not an endless source of cash out there from the government or employers. So a big lump sum from a critical illness policy or a monthly sum from income protection is going to give you options. You can focus on the most important thing, whether that’s getting better or that grieving process, without having to worry about bills.

Unfortunately we live in a world where everything costs money. There’s a cost of living crisis at the moment where we’re more aware than ever of how much things cost. To lose an income due to an injury or an illness can make things financially very difficult for people.

So for me the major benefit of protection is that reassurance that you don’t have to panic about your mortgage or your bills straightaway. You can focus on what’s important.

Do I need mortgage protection insurance if I already have life insurance?

If you’ve taken out life insurance, fantastic. But there’s generally a reason why someone’s taking out life insurance. If you bought in life insurance before you had a mortgage, and you’ve now bought a house, do you need to look at it again? Perhaps it was just for personal protection before – do you want it to now cover your mortgage?

Also, does your current life insurance cover the new mortgage? Will it last the same length of time? We will do an in-depth review of the policies you currently have to make sure they fit your circumstances and goals.

As I mentioned earlier, everybody thinks mortgage protection is life insurance. But critical illness cover and income protection are also really important. If you have no income, how are you paying for your life insurance? Just because you have a life policy in place, it doesn’t mean you can’t look at other aspects of cover as well.

What factors should I consider when choosing a mortgage protection insurance policy?

The key is what you want it to be for. For a single person buying a property, I explain that life cover is generally bought for someone else. So is that going to be massively important for a single person buying a property on their own? Maybe not, unless they want to leave it to someone. Instead, they may want to focus on critical illness cover which actually directly impacts them and directly helps them.

For a couple buying together, do they want to buy joint cover or buy it singly? Do they want extra cover for the children? Do they want to cover one income and not the other? There are lots of factors that go into that and no two circumstances are exactly the same.

No family dynamic is exactly the same. We will take all of those factors into play when we’re trying to design the right protection policy for you and your family.

Can I get mortgage protection insurance if I have a pre-existing medical condition?

Yes, you can. It does depend on what the pre-existing medical condition is and the severity of that condition, and whether you’re still having tests for it.

When we recommend you a policy, if there are pre-existing medical conditions we can check with the insurers on whether they will exclude the condition or increase the price of the policy because of it.

Before any policy starts, you have to go through a health questionnaire to determine any conditions you may have and the risk factor is based on that. I’ve known people to get critical illness cover when they’ve had cancer in the past. I’ve had people have mental health issues excluded from their policy because they’ve had depression.

It varies from insurer to insurer and on the specific conditions. It’s something that we will discuss with you as we’re going through our policy recommendations.

Are there any exclusions or limitations to mortgage protection Insurance policies?

Exclusions and limitations are generally based on your health. Insurers have the ability not to give you a policy based on that, and also on the type of work you do. It’s very difficult for someone in the army to get income protection, for example. Certain categories of jobs are limited in the policies they can get.

Age is a factor as well. Providers will have ages that their policies will go up to depending on the type of job and how much you want to insure yourself for. There are exclusions and limiting factors that depend on your circumstances.

How long does mortgage protection insurance coverage typically last?

Again it depends on the type of policy. With life cover, it does vary by insurer but some will go to the age of 90. Potentially there is a maximum age at which you can start taking life insurance out as well – one example of that is age 77.

There are also variations depending on the type of policy. With income protection the maximum age may depend on the type of work you do. Someone in an office environment doing an admin-based job will be able to take their income protection policy longer than, for example, a labourer or someone in a hands-on job.

What happens if I can’t pay my mortgage due to unforeseen circumstances?

Your mortgage offer talks about the consequences if you are unable to pay your mortgage payments. In big, bold black letters it says that as a last resort we may repossess your property. Ultimately that is the worst case scenario.

Falling into arrears or missing payments is not great and goes against you in the future. So mortgage protection is there to try and limit that happening. If you’re off work and you’re only receiving statutory sick pay, income protection will kick in to help you pay your mortgage payments.

If you are diagnosed with cancer and you can’t work because you’re having chemotherapy, there’s a lump of money to help you pay your mortgage payments.

We know life can be quite cruel, and you never know what might happen. But ultimately if you don’t pay your mortgage, it does lead down a dark path to repossession.

This is a tricky part of our job – nobody likes to talk about death or being ill. I’ve come across people that have a ‘Superman’ complex where they think it will never happen to them. But most people have seen something unexpected happen within their own family or social circle or even to celebrities.

What is the cost of mortgage protection insurance? How is it calculated?

It’s a very difficult one to answer – so many different factors affect the cost of your policy. These include your age when you apply, the age that you’re going to take until, the insured amount and whether you smoke. That’s a big one. Pre-existing medical conditions also factor into the cost.

From a provider’s perspective they will look at your risk and use complex risk statistics to calculate the price. If you’re a 20 year old male taking a life policy to 40, statistically your life. expectancy is a lot longer so your cover is going to be quite cheap.

It’s all based on statistics and previous claims on other policies. It’s a bit like car insurance – if everyone else has crashed their cars at a young age, that’s why we get hit with expensive car insurance when we’re eighteen years old.

With protection, as you get older, statistically more things are likely to happen to you and that will affect the cost. It’s very complex.

Is mortgage protection insurance mandatory in the UK?

Actually your mortgage offer will tell you what is mandatory. Building insurance is mandatory for a mortgage and it states that on your mortgage offer. Life insurance isn’t. It’s recommended in your mortgage offer and your solicitor’s paperwork, but it’s not mandatory. It used to be, but no longer.

Can mortgage protection insurance cover more than just the outstanding mortgage amount? Can it help with other financial obligations?

You can have a life policy to cover your mortgage, but you may want more. You may want to be able to provide a lump sum to your surviving partner, your children, your family. There is an element of personal protection in there.

Ultimately, you can insure yourself for as much as you see fit as long as there’s a good reason for it. We don’t like to pick numbers out of the air. We will want to understand what you want to do and why.

But you can certainly insure yourself for more life cover or critical illness cover. With income protection it’s different, because it’s based on your current income. You can’t just decide to insure yourself for £100,000 a year when you only earn £40,000 – there are limitations on that.

You can use life and critical illness cover to help with other debts if you have them. For example if you’ve taken a 10 year loan you might want to cover that. If you have savings, some financial planners will look at those and see if you want to cover that as well. Just in case. Mortgage protection is there to protect you and cover what you need it to.

What are the alternatives to mortgage protection insurance?

Mortgage protection is a range of products – life insurance, critical illness cover, income protection, family income benefits etc. There are alternatives within that overall area of insurance. It’s basically taking a range of different policies and creating cover that’s suitable for your circumstances and for your family.

I saw some statistics about income protection earlier today – and only 8% of adults in the UK have this. That’s just so low, considering that income is the one thing that gets us through life.

There’s an analogy of having a machine in your basement that on the first of the month churned out lots of money. You would make sure that machine was serviced and well looked after so every time you pressed that button it would give you the money.

But we are that machine. We’re the ones that need servicing to make sure we can pay that mortgage payment for potentially 35 years. That’s an awful lot of mortgage payments to be healthy for. You need to never fall over in the snow and break your leg and not be able to work. I’ve had someone claim on an income protection policy for that reason.

So that’s why we invite people to talk to us about their circumstances and what feels important for them and what they want to cover. Some will find it really important, and others might worry about the cost.

But in that situation we can look at how much you’re willing to spend instead and budget with that. £50,000 in critical illness cover may not pay your whole mortgage off, but it’s better than having no safety net at all if something were to happen. It’s really important to just think about this and discuss it with a professional.

Your home may be repossessed if you do not keep up with your mortgage repayments.