Guide to Mortgage Protection Insurance
Mortgage protection insurance is a type of life insurance policy that pays a lump sum direct to your lender to pay off your mortgage if you die. Your policy runs for the same length of time as your mortgage, and the amount you pay each month is fixed for the term of the mortgage. It is one of the cheapest forms of life insurance.
Do I need mortgage protection insurance?
If you are under 50 when you take out a mortgage for a home you will live in, your lender must make sure you have life insurance to pay off the loan if you die. The main reason for this is to make sure your family home would not have to be sold to pay off the mortgage. You do not have to take out this insurance if you are over 50 or if your mortgage is on an investment property, but it can be an advantage and some lenders may insist on it as a condition of getting the mortgage.
Your lender can insist you get mortgage protection insurance but you are free to shop around and you do not have to buy it from your lender.
How much cover do I need?
Your mortgage protection sum assured is the amount that would be paid out to clear your mortgage if you died, so it must be at least as much as your mortgage. It generally reduces from year to year as the amount you owe on your mortgage goes down. This is called reducing term insurance.
A slightly more expensive type of mortgage protection insurance, called a level term policy, keeps the same amount of cover throughout your mortgage term. It is usually used for an interest-only or endowment mortgage, where the capital balance you owe stays the same until the end of your mortgage term. You can also choose a level term policy with a traditional decreasing mortgage. That means you may have more mortgage protection insurance than is needed to clear your mortgage at any point in time. Your lender would then pay out to your estate any extra benefit left over after paying off your mortgage if you died during the mortgage term.
Do I need mortgage protection if I already have life insurance?
Mortgage protection is designed to pay off your mortgage if you die, not to provide a cash sum to your dependants. So, you will usually need separate life insurance to provide for a cash lump sum if you have a dependent family.
You can, if you want, use an existing life policy for mortgage protection. To do this, you would have to ‘assign’ the policy to your lender. This means you would agree to your insurance company paying the policy benefit to your lender if you died during the term. Any policy benefit left over after paying off the mortgage goes to your estate. If your total life policy benefit is used up to pay off your mortgage when you die, there will be no cash lump sum available for your dependants. So, it is generally better to have separate mortgage protection and life insurance.
If you have a mortgage in your own name only, you would look for a mortgage protection policy to cover your own life. If your mortgage is in joint names, your mortgage protection policy will also need to be in joint names. This means that the policy pays off your mortgage if either one of you dies before the end of the term.
Do I have to buy mortgage protection insurance from my mortgage lender?
Most mortgage lenders offer to arrange mortgage protection insurance for you when you apply for a mortgage. They act as an agent of a life insurance company and get commission from them for introducing your policy under their group scheme. You pay your premiums as part of your mortgage repayment, so this can be convenient for you. However, sometimes your lender’s policy may cost you more than if you bought it through a broker or direct from an insurance company. You do not have to take the mortgage protection policy your lender recommends. Your lender cannot refuse you a mortgage just because you don’t accept their policy. Your lender must accept any suitable policy that is assigned to them – this means that if you die, the insurance company pays the policy benefit direct to your mortgage lender.
You may also be more restricted with a lender’s group policy than if you had your own separate policy.
Suppose you want to switch your mortgage at some stage. If you have a mortgage protection policy through your existing lender, they will cancel the policy when you transfer your mortgage. So, you will have to apply for cover again. As you are older, it will usually cost you more. And, if you are not in good health, you will have to pay an even higher premium or you may not be able to get cover at all. If you have your own mortgage protection policy, you can simply transfer it to a new lender. The premium and level of cover will be the same as before, as long as the amount you borrow or the term of your mortgage does not increase. If you borrow more, you can take out a second policy to cover you for the extra amount.