For many homeowners, their worst fear is being unable to make repayments on their mortgage leading to the possibility that their house may be repossessed. This is why mortgage payment protection insurance (MPPI) is fairly popular.
Mortgage payment protection insurance is a product that is designed to cover your monthly mortgage repayments for a set period of time should you be made unemployed or suffer from an illness or long-term sickness that prevents you from earning an income.
Should I buy mortgage payment protection insurance?
In these unpredictable times, job losses are becoming more and more common place. It is therefore very important to consider your ability to meet important financial commitments, and if you are worried about this then taking out a MPPI policy will at least mean that, whatever may happen to your ability to earn an income, your mortgage will get paid.
It is also very important to be aware that most MPPI policies only pay out for a limited period, for example up to a year, so if you would be able to cover your repayments for that time anyway it may not be worth taking out this cover.
The following points may help you assess whether you should buy MPPI:
- Would you get a redundancy payment? In the event of unemployment, if you would receive a payout for long service, the unemployment element of MPPI may be unnecessary. However, you may want to look at getting accident and sickness cover.
In the current economic climate it is sensible to take a moment to think about how you would be impacted by redundancy; and if possible put a back-up plan in place.
- Do you get decent sick pay? If an accident or sickness stopped you working, would your firm pay you a proportion of your salary? If you have good sick pay terms as a benefit of your employment, the accident and sickness element of MPPI policies is probably unnecessary. Some policies will cover you solely for unemployment, and are therefore cheaper.
- Are you self-employed? Most, but not all, MPPI policies now cover self employed people, although usually only if the business ceases to trade due to circumstances beyond your control. You should always check how your individual scenario would be covered.
- Do you have sufficient savings? Payments from a claim on a MPPI policy usually only last for a year, meaning that the maximum payout is twelve times your repayments. If you can cover this from your savings anyway, there may not be a need to buy a policy.
- Already covered? Many other protection policies cover similar circumstances; the most common is permanent health insurance which pays out a proportion of your salary if illness prevents work. It is more expensive, but it pays for longer and can be used in conjunction with unemployment-only MPPI. It may also be the case that your work provides you with some form of cover so do check.
- Already experiencing payment problems? If you are already in arrears with your mortgage, it’s unlikely you’ll be able to insure yourself.
- Were you aware of a distinct possibility of being made redundant? If there is a realistic chance of redundancy at the time you take out the policy, it could be deemed invalid. This certainly applies if you’ve been told your specific job is being considered for redundancy, but it may also apply if you’ve been told some jobs in your firm may be at risk.
Things to consider when buying mortgage payment protection insurance
MPPI policies do vary, so check that the cover will meet your specific requirements, such as:
- When will it pay out? Policies normally start paying out either 30 or 60 days after the problem occurs, yet most will backdate the benefit so you will be paid out for the earlier period too. This way they do not have to provide cover if you are only out of work for a couple of weeks.
- Most policies only pay out for a limited term (usually 12 months).
- There is a maximum payout level. Many policies limit the monthly payments covered, so those with larger mortgages may find this a problem, especially if interest rates rise.
- Check whether any of the MPPI policies you are considering may also provide cover for other expenses related to a mortgage, such as buildings insurance.
- Be aware that switching your policies not always a good thing. Switching policies can save you money if it simply means cancelling your existing cover and getting a new, cheaper policy. However, many policies operate initial exclusions preventing claims within the first three to six months, and some do not pay out to anyone with pre-existing medical conditions or who could have foreseen redundancy when it was taken out. This is a crucial point. If the insurer could argue that you knew you may lose your job when you switched to it, then it is possible you will be left uninsured. In which case, if you want to be sure that you are covered you may be best to stick with what you’ve got.
Mortgage payment protection insurance is a relatively inexpensive way to protect yourself by ensuring that you can continue to meet mortgage repayments. However, make sure that you know what you need and the limitations that may apply before you purchase a MPPI policy.
If you are unsure, seek advice
MPPI is not often straightforward, so it is important to check that you are appropriately covered.
If you believe that you need a MPPI policy but feel uncomfortable checking out the options yourself, then it is best to seek professional advice. Go and see a mortgage broker or an IFA who will be able to guide you through the process and advise you on the various options and polices available and recommend one that is the most suitable for you.