Protecting your mortgage
Many lenders offer mortgage payment protection insurance (MPPI) when you apply for a mortgage. The idea behind it is that it will pay your mortgage should you later be unable to work because you're sick, have had an accident or you have been made redundant.
There is no legal obligation to take out an MPPI policy but if you have a mortgage and dependants, it's worth thinking about.
However, as always, it's important to compare policies carefully before signing up to one. Don't simply take the policy offered by your bank or building society as you may find it's cheaper to go to an independent provider. The terms of the policy can vary so look beyond the price to check it will be sufficient if you need to claim.
Often you will find that these policies only pay out for up to a year. So if you have a lot of savings in place, you may prefer not to opt for this type of cover. You should also check how much your employer is likely to pay you if you were made redundant.
Those of you that have been in the same job for several years may get a decent payout, in which case you may not need the redundancy element of MPPI.
Likewise, check how much sick pay your employer would give you should you fall ill. If you would receive a large sum, you may prefer to only opt for unemployment cover. But before you dismiss this type of cover, do make sure you can definitely afford to go without it.
Details you need to look out for:
1. How long do you have to wait before you can make a claim? Often there's a waiting period of three to six months after you've stopped working before you'll receive payments. This clause will make the insurance cheaper, but you need to consider whether you could you cope without any income for this long and whether you're covered by your employment contract for a number of months.
2. Other policies will have a 'back to day one' clause, meaning that payments will kick in immediately once your claim has been processed.
3. Also check how long payments will continue - the majority stop after 12 months while some run for 24 months. In the current climate, finding another job after being made redundant may take longer than you think.
4. Check whether it includes redundancy. The self-employed and contract workers are unlikely to be able to claim for this. If your employer made it known some staff would be made redundant before you took out the policy, your claim will be rejected.
5. What are the monthly payments capped at? Will it be enough to cover your mortgage?
Another option is to take out income protection which covers you for more than your mortgage repayments. How much you pay for your policy will depend on various factors including your age, your occupation and whether or not you smoke.
The maximum amount of cover you can buy is typically around half your income. Check whether your employer offers this sort of cover as one of its staff benefits before buying it.
Payments are not taxed and you can choose whether to be insured for a short or long-term. If you go for a long-term policy, you will receive a monthly income until you can return to work or retire. But be aware that policies vary:
- Some policies will pay out if you can't do your own job – this is the most expensive option.
- Some only pay out if you are unable to do your own job as well as any other role that might suit your experience.
- Other policies only pay out if you can't carry out any job.
- The lowest level of cover only pays out if you can't carry out certain day-to-day tasks.
Most policies are designed to cover you if you can't work because you are sick or have been injured and won't cover you for unemployment although in some cases, you can opt to add this on.
Depending on the sick pay your employer offers, you can defer the start date for when claims will be paid out. For instance, if your firm will pay you your salary for the first three months, you could choose one that will start paying after you've been signed off for three months. The longer the deferment period is, the cheaper the premiums. Income protection is suitable for the self-employed.
The short-term version of income protection is known as income payment protection insurance or accident, sickness and unemployment (ASU) cover. It only provides cover for around 12 months and as the name suggests, it covers you if you can't work due to sickness or an accident or if you become unemployed.
- MPPI covers you if you can't pay your mortgage
- You don't have to take MPPI with your lender
- Income protection covers you for more than your mortgage
Compare policies carefully – compare both the price and the level of cover