Confused about mortgage protection and life insurance? We make both clear.
Should you unexpectedly find yourself out of work through illness or redundancy, mortgage protection can be a valuable policy to have in place. However, be careful not to confuse it with life insurance, which will only ever pay out if you die. So, if you have a mortgage, family or other responsibilities, it’s a good idea to explore whether you need cover to protect your ability to pay your mortgage.
But if the worst should happen, you may also need a life insurance policy, which will help dependants meet your outstanding financial obligations.
MPPI
Mortgage payment protection insurance covers your mortgage payments should you be unable to work due to accident, illness or redundancy.
Mortgage payment protection insurance (MPPI) covers your mortgage payments should you be unable to work due to accident, illness or redundancy.
The cost of MPPI cover depends on the size of the mortgage. Lenders currently charge around £5 per £100 of mortgage payment you wish to insure each month. So, if your mortgage payments are around £500 per month you would pay around £50 per month to protect the payments.
Make sure you compare mortgage protection policies, though, as MPPI often has a general limit of £1,500 per month. Depending on the policy, MPPI will normally cover your mortgage payments for 12-48 months.
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Accident, sickness and unemployment
ASU can be used for anything whereas MPPI denotes it is to be used for a mortgage
Accident, sickness and unemployment (ASU) is very similar to MPPI. In simple terms, ASU payouts can be used to cover any monthly outgoings (including mortgage payments), whereas MPPI denotes it is to be used for mortgage payments only.
If you can’t work due to illness, injury or redundancy, ASU cover will pay you a fixed monthly sum to cover things such as your monthly bills, mortgage payments, various other loan repayments or even rent that you might have.
You choose how long and for how much the policy will cover you should you suddenly find yourself out of work for whatever reason.
However these policies are only intended for the short term - an ASU policy will pay out for an absolute maximum of two years, by which time you are expected to have got another job or recovered from illness.
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Life insurance
Life insurance is completely different to MPPI and ASU - and much less complicated. The golden rule is that it will only pay out if you die.
A popular form of life insurance is mortgage term insurance, which has one clear objective - to pay off an outstanding mortgage in the event of death during the term of the policy. This means your loved ones could continue to live in the family home even if you’re no longer with them, without worrying how they’ll pay the mortgage.
But remember it is a policy which does not help you if you lose your job or get sick, but it helps your family who would otherwise be in financial difficulty if you were to die.
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So where should I put my money?
Many people believe that protecting their income is a top priority and so will look to MPPI and ASU policies. However, don’t assume you’ll be eligible for such a policy as exclusions will include most people who are self-employed.
You should also check your own circumstances, as some people are already covered by the company they work for. If for example you are a school teacher you will get full sick pay for the first 100 working days and half pay for the subsequent 100 working days. However, this only happens after you have been a teacher for at least four years. That said, you should still consider taking out income protection if you are a teacher - depending of course on individual circumstances and what you need to cover.
Some other firms pay sick pay at “director discretion” - it does not really mean anything, so do not rely on it, as “discretion" means it’s not be a contractual obligation on your employer’s part and there is no guarantee you’ll receive any sick pay. If that’s the case, you should arrange your own cover.
Many independent financial advisers concur that, in terms of what people should have, income protection is first because, without income, a person is in danger of losing everything else.
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THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP
REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
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