Mortgage Protection Insurance

What It Is and Why It's Worth Thinking About

When I sit down with clients to talk through a mortgage, the conversation almost always focuses on the rate, the term and the monthly payment, which makes complete sense because those are the numbers that shape what the mortgage looks like day to day. What often gets less attention, at least initially, is what happens to the mortgage if something goes wrong, and that's a conversation I think is just as important.

Mortgage protection insurance is a broad term that covers a few different types of cover, and understanding what each one does is the starting point for working out what's relevant to your situation.

Life Insurance

The most straightforward form of mortgage protection is life insurance, which pays out a lump sum or clears the outstanding mortgage balance if you die during the term. For anyone with a partner or dependants who would need to continue living in the property if they lost you, this is the most fundamental form of protection available, and the cost is generally lower than people expect, particularly for younger borrowers in good health.

There are two main types relevant to mortgages: level term insurance, which pays a fixed lump sum regardless of when during the term a claim is made, and decreasing term insurance, which is specifically designed to track a repayment mortgage by paying out an amount that reduces over time in line with the outstanding balance. Decreasing term cover is typically cheaper, because the maximum payout reduces as the policy progresses.

Critical Illness Cover

Critical illness cover pays out a lump sum if you're diagnosed with a specified serious illness during the term of the policy. The conditions covered vary between policies and it's important to read the definitions carefully, but typically include things like cancer, heart attack and stroke. The payout can be used to clear the mortgage, cover adaptations to the property, replace income or meet any other financial need at what is likely to be an extremely difficult time.

Critical illness cover can be taken out alongside life insurance in a combined policy, which is often more cost-effective than two separate policies, or as a standalone product.

Income Protection

Income protection is different from both of the above in that it pays a regular monthly income rather than a lump sum, and it's designed to replace a proportion of your earnings if you're unable to work due to illness or injury. For someone whose mortgage payment depends on their monthly salary, income protection is arguably the most directly relevant form of cover, because it's the one that keeps the mortgage paid if you're off work for an extended period.

The waiting period before the policy pays out, known as the deferred period, is something worth thinking about carefully. A longer deferred period typically means a lower premium, but it also means a longer gap between stopping work and receiving any payment, so it needs to be matched to whatever savings buffer you have available.

Why This Matters

I'm not here to tell anyone what they must do with their finances, but I do think it's worth having the conversation about protection at the same time as the conversation about the mortgage itself, because the two are connected. A mortgage is a long-term commitment, and the things that can disrupt your ability to meet it, illness, injury, death, don't come with much notice.

If you'd like to talk through what protection might look like for your situation alongside your mortgage, I'm happy to include that in any conversation we have. Get in touch and we'll look at the full picture together.

Barry, The Mortgage Network - Helping you make confident decisions and plan a mortgage that works for you.