Mortgage protection insurance
Mortgage protection insurance is a life insurance policy that pays off your mortgage if you or your partner die during the term of the mortgage. It runs for the same length of time as your mortgage. So, if you take out a mortgage over 20 years, your mortgage protection insurance must also be in place for 20 years. If you die during the term, your insurance company pays the policy benefit directly to your mortgage lender. Your lender uses the amount needed to pay off the mortgage and, if there is any left over, they will pass it to your estate. You can change insurer during the term of your mortgage if you find better value elsewhere.
By law, your lender must make sure that you have this cover before taking out a mortgage. However, your lender may allow you to take out a mortgage without having mortgage protection insurance if:
- You are buying an investment property
- You are over 50 years old
- You cannot get this insurance
- You have a life insurance in place already. You can use an existing life insurance policy as long as it is not already pledged or assigned to cover another loan or mortgage and it provides enough cover
This type of insurance does not cover your repayments if you cannot work due to redundancy, sickness or disability. For this type of cover, you will need to consider other types of insurance such as income protection, serious illness or payment protection.
Types of mortgage protection
What benefit do you get?
Do you have to buy mortgage protection insurance from your mortgage lender?
Do you need mortgage protection if you already have life insurance?
What happens to your policy if you change your mortgage?
Generally, your mortgage protection cover reduces over time, as the amount you owe on your mortgage goes down. This is called ‘reducing term cover’. By the end of the mortgage term the cover will have reduced to zero as the mortgage will then have been fully repaid, assuming all repayments have been made on time. It is the most common and the cheapest form of life cover.
You can also get a more expensive type of mortgage protection policy, known as a ‘level-term policy’. The amount you are insured for and the premiums you pay remain level. This provides you with the same amount of life cover throughout the mortgage term. This policy is usually used for an interest-only mortgage or an endowment mortgage, where the original mortgage amount is still owed until the end of the mortgage term.
You can also use a level-term policy with a traditional decreasing mortgage. This means you will have more life cover than is needed to clear your mortgage at any point in time, and the extra benefit is then passed to your dependants if you die.
If you wish to, you can add serious illness cover to your mortgage protection policy. This means your mortgage will be cleared if you die or if you are diagnosed with a serious illness that is covered by your policy. You should remember your premium will be considerably higher if you choose to add serious illness cover to your policy.
If you die, your insurance company pays the policy benefit directly to your mortgage lender. Your lender uses the amount needed to pay off the mortgage and, if there is any left over, they will pass this amount to your estate. If the policy is not enough to pay off the mortgage in full, part of the mortgage will still be owed.
If you have a mortgage in your own name only, you would generally 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 your mortgage is paid off if either one of you dies before the end of the term.
Most mortgage lenders offer to arrange mortgage protection insurance for you when you apply for a mortgage.
You do not have to take the mortgage protection policy your lender offers you and you are free to shop around for a suitable policy. Your lender cannot refuse you a mortgage just because you don’t accept the policy they recommend.
It may be convenient for you to arrange your mortgage protection insurance through your lender as you can pay your premiums as part of your mortgage repayment.
However, be aware that if you buy the policy through your lender, you are insured under the lender’s group policy. This may restrict you if you want to switch your mortgage later on as your lender will automatically cancel your mortgage protection insurance when you move your mortgage. This means that you will have to buy new mortgage protection insurance when you move your mortgage and the older you are, the more it will cost. If your health has dis-improved since taking out your mortgage, you may find it difficult to get new mortgage protection cover.
Generally, mortgage protection is designed to pay off your mortgage if you die, not to provide a cash sum to your dependants (unless you take out a level-term policy). So, you will usually need separate life insurance to provide for a cash lump sum if you have a dependant family.
You can, if you want, use an existing life policy for mortgage protection, so long as the amount you are insured for is at least equal to the value of your mortgage and it runs for the same term. To do this, you would have to ‘assign’ the policy to your lender. This means you would agree to give the life insurance benefit to your lender to pay off your mortgage if you die during the term.
Any policy benefit left over after paying off the mortgage goes to your dependants. If your total life insurance benefit is used 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.
That depends on whether you are:
- Topping up or extending the term of your mortgage
- Switching your mortgage
- Paying off your mortgage early
You should not cancel your mortgage protection policy unless you have another policy in place.
If you are topping up your mortgage, you could get a new mortgage protection policy for the total amount of your new mortgage, or just for the top-up amount. Compare the costs and benefits of both options. It may be cheaper to keep your original mortgage protection policy going and buy another policy for the top-up amount. You should check the cost of cancelling the original policy and replacing it with a policy for the full amount of your new mortgage.
Whether you are topping up your mortgage or extending the term and need to get a new policy, you may find that your premium is higher than the last time you took out cover. This is because you are older and your age affects your premium. However, if you have given up smoking, or if rates have come down since the last time you applied for cover, you may be able to get cheaper cover.
If you switch your mortgage, your options depend on whether you have your own policy or a group policy through your lender.
- If you have your own policy, you can simply assign it to your new lender. The premium and level of cover will be the same as before, as long as the amount you borrow and the term of your mortgage does not change.
- If you have a policy through your lender’s group scheme, your lender will cancel the policy when you switch your mortgage. So, you will have to apply for cover again and it may cost you more, as you will be older than when you first took out the policy. And if you are not in good health, you will have to pay a higher premium or you may not be able to get cover at all. Before you switch your mortgage, make sure that you can get mortgage protection insurance if your current mortgage protection is through your lender’s scheme.
If you pay off your mortgage earlier than planned, you can:
- Cancel your mortgage protection cover and pay no further premiums, or,
- Keep the policy and pay premiums until the original end date
If you decide to cancel the mortgage protection cover, always check with the insurance company that the policy has been cancelled. Where the policy has been arranged through your lender, your lender will cancel the mortgage protection policy on your behalf but you may want to check to make sure. If the policy has not been cancelled by your lender, ask the insurance company what your lender needs to do to ensure the policy is cancelled and no more premiums are collected from you. Also make sure that if you have been paying premiums by direct debit, that you cancel the direct debit in writing.
If you pay off your mortgage earlier than planned, it is a good time to consider whether you need additional life insurance. If you decide to keep your existing policy, it would no longer need to be used to clear your mortgage. So any benefit would be paid to your dependants if you died before the policy finished. This could be a useful source of extra life cover. On the other hand, you may decide to take out new life insurance, depending on your age and state of health.
You may not have this option of keeping your mortgage protection policy if it was taken out through a group policy with your lender, as they will usually close off the policy when your mortgage is cleared.