Mortgage protection insurance

Mortgage protection insurance is an insurance policy that pays off your mortgage if you or another policy holder dies during the term of the mortgage. If you have a joint mortgage, both people need mortgage protection insurance. 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.

By law, your lender must ensure you have this cover in place when you take out a mortgage. However, a lender may agree to give you a mortgage without this cover if:

• You are buying an investment property
• You are over 50 years old
• You cannot get this insurance, for example due to a current serious illness, health issue or dangerous occupation
• You have a life insurance policy in place already

Exemptions are made on a case by case basis and even if you fall within one of the above exemptions the lender may make it a condition of the mortgage that you have mortgage protection in place before they approve your mortgage. It is important to know the financial risk of having no cover in place before signing up to the mortgage. In the event of death, there will be no insurance policy to pay off the mortgage so the joint owner or your beneficiaries will have to continue repaying the mortgage.

Types of mortgage protection

Reducing Term Cover: as you pay more off your mortgage, the amount that the policy covers reduces in line with the outstanding balance of your mortgage. Under normal circumstances the policy will end once the mortgage is paid off. It is the most common and the cheapest form of mortgage protection. Generally, your premium does not change, although the level of cover reduces.

Level Term policy: the amount you are insured for and the premium you pay remains level. This gives you the same amount of cover throughout the term of the mortgage. If you die before your mortgage is paid off, the insurance company will pay out the original insured amount. This will pay off the mortgage and any remaining balance will go to your estate.

Serious Illness: if you wish to, you can add serious illness cover to your mortgage protection policy. This means your mortgage will be cleared not only if you die, but also if you are diagnosed with, and recover from, a serious illness that is covered by your policy. Serious illnesses typically covered include, but not limited to, stroke, heart attack and some types of cancer. This will be more expensive than other types of cover.

Life Insurance policy: 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. Additionally, if there is a balance remaining after the mortgage is clear, this will go to your estate.

Where to get mortgage protection insurance

Mortgage lenders

• Most mortgage lenders offer to arrange mortgage protection insurance for you when you apply for a mortgage.
• It may be convenient for you to arrange your mortgage protection insurance through your lender as you can pay your premium as part of your mortgage repayments. However, you should always shop around for a policy. It is important when shopping around that you compare both cover and price. A policy may appear cheaper on the surface but not have as much cover as another, slightly more expensive one.
• Be aware that if you buy a policy through your lender, you may be under the lender’s group policy. This may restrict you if you want to switch your mortgage later on.

Broker

• You may wish to use a mortgage broker to arrange your mortgage protection insurance.
• Brokers usually compare a number of policies from different providers to make sure that you get the policy to suit your current needs and also the best deal.
• Brokers will also make sure you are fully aware of any differences in cover between each option.
• Brokers may charge a fee for their services or receive a commission from the first year’s premium paid on the policy.

Existing life insurance policy

• You can use an existing life insurance policy for mortgage protection, as 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.

What happens to my policy if I change my mortgage?

If you are changing your mortgage there are a number of things to consider, depending on whether you are topping up or extending your mortgage, switching or paying the mortgage off early.

Topping up your mortgage

If you are topping up your mortgage, you will need to make sure that your policy meets the new value of 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 and then buy a second policy for the top-up amount. 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.

Switching your mortgage

• When switching your mortgage you will assign your mortgage protection to the 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 either the amount you borrow or the terms of the mortgage change, you may need to increase your mortgage protection cover to ensure that you are still fully protected. You may be able to increase the cover on your existing policy. If this is not possible and you need to take out a new policy, it may cost more as you are now older and you may not get cover at all if you are not in good health.
• If you have a policy through your lender’s group scheme, your lender will cancel the policy when you switch your mortgage. Before you switch your mortgage, make sure that you can get mortgage protection insurance as it will cost more as you are older and if you are not in good health you may not get cover at all.

Paying off your mortgage early

If you are in a position to pay off your mortgage early then you generally have two options. You can cancel your mortgage protection cover and pay no more, or keep the policy and continue paying until the original end date. You might choose to keep the policy and continue to pay if you have a policy that covers more than just your mortgage, for example life insurance or level term cover.

Cancelling your mortgage protection

• If you decide to cancel the mortgage protection cover, always check with the insurance company that the policy has been cancelled. If the policy is not cancelled correctly, payments may still be taken from your account.
• If the policy has been arranged through your lender, your lender will cancel the policy on your behalf but you should check to make sure this has been done.
• If the policy has not been cancelled by your lender, ask the insurance company what your lender needs to do to make sure the policy is cancelled and no more payments are taken from you.
• Make sure that if you have been paying by direct debit, that you cancel the direct debit in writing.

Keeping the policy

• If you decide to keep paying into the policy after paying off the mortgage, you will still be covered by the policy in full up until its expiry.
• If you die before the policy finishes, it would no longer need to be used to clear your mortgage. So any benefit would be paid to your dependants/estate.
• If you have a group policy with your lender, they may close off the policy once the mortgage is cleared. There may be no option to keep the policy open.

Making a mortgage protection claim

Making a mortgage protection claim involves some paperwork. There are a number of basic steps you should follow:

• Contact your insurer or broker: you will need to notify your insurer or broker that the policyholder or one of the policyholders in the case of a joint life policy, is deceased. As a mortgage protection policy is assigned to your lender, usually your bank, the balance on the policy will be paid directly to the lender.
• Complete a claims form: you will need to submit a claims form to your insurer when making a claim. Remember to complete the forms as accurately as possible to avoid delays or refusal or your claim. If you are unsure of any information requested on the form, contact the insurer or broker.
• Get your paperwork in order: your insurer may ask for documentation such as the original policy document, certified copies of the death certificate and will if available. The insurer or broker will advise what documentation is required during the initial contact.

Last updated on 11 October 2021