What is it?
Mortgage Protection Insurance (or MPPI for short) has been designed to overcome the consequences of unemployment and disability enabling you to still meet your mortgage or Remortgage repayments.
Why is it important?
Imagine that you are made redundant or you have an accident that leaves you unable to work for a period of time – would you be able to afford your monthly mortgage repayments? If you only have State benefits to rely on, you will find it tough to cope financially.
However, if you have a mortgage protection insurance policy, your mortgage repayments will be met (up to a pre-agreed limit) each and every month, for up to twelve months. This gives you breathing space to find another job, or , if you have had an accident or have not been able to work due to sickness, time to concentrate on getting better.
A mortgage is the probably the biggest single financial commitment that you will ever make so it makes sense to protect your mortgage to ensure that payments can be met even if your financial situation changes.
The basics
MPPI is not compulsory, although it can be a condition of some loans. But anyone with a mortgage should consider taking it out. For people who might have stretched themselves financially with their mortgage it is probably even more important to be covered in the event of unforeseen unemployment. Good policies will cover any bills related to your mortgage - including interest and repayments.
The State benefits for people in this situation are limited and they are means tested, so if you have savings you would be expected to use them first. Also, expect to wait around nine months before you see any payout.
A good MPPI policy will start to pay one month after you are out of work (either through illness or redundancy). Typically policies pay out for 12 months. It is expected that within that period people will have found other employment or recovered from illness.
Costs, payments and providers
Once you tell your provider that you're out of work and this is verified, your insurance payments should begin, typically after around one month without a salary. It is usual in most cases that payments are made directly to your mortgage lender, although in some cases payments are made to the customer.
There is really not much variation in cost between different providers. On an average mortgage payment of £650 a month, cover sold by most banks and building societies would cost about £450 a year. Remember that most of this goes in commission to the salesman so he or she has a strong incentive to get you to buy.
Most people tend to buy MPPI from their mortgage lender at the time of the transaction or if they go through a broker/adviser - through that broker. But MPPI can be bought as a stand-alone product from any provider. You can obtain a list of MPPI providers from the Association of British Insurer's website (see below).
Watch out for lenders who insist that you should take their insurance. Go elsewhere and shop around.
You can also get policies which cover other bills in the event of illness or unemployment - such as credit card and car loan payments.
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