A mortgage is the biggest financial commitment most of us will ever take on and if for whatever reason you’re unable to work you will still be expected to make your repayments.
Although if the worst were to happen the state will provide a very basic safety net – such as jobseekers allowance – benefits will not give you anywhere near enough money to pay for your mortgage and other living costs. So it makes sense to take out some form of mortgage protection insurance.
There are a range of products on the market you can take out to give yourself peace of mind that you will be able to meet your mortgage repayments. Income protection insurance is the best option for most people as it provides the most comprehensive protection. But if you’re on a tight budget, income protection can be expensive, so it may be worth considering mortgage payment protection insurance.
Income protection insurance will pay out if you’re unable to work due to an accident or ill health. This type of insurance provides a long term safety net as it’s possible to get insurance that will cover you from when you’re off work until you can go back. Even if it’s unlikely that you will ever be able to return to work, the cover should keep up your payments until your pension kicks in.
The monthly pay out will be a proportion of your income, normally 50% – 70%, this should be enough to not only comfortably pay your mortgage but also to help with other living costs like bills and groceries. And because you are not taxed on income protection payouts, it should replace most of your take home pay.
You can also choose to take out additional unemployment cover if this is something you’re worried about.
Mortgage Payment Protection Insurance (MPPI)
If you are on a tight budget and can’t afford income protection, then having MPPI is certainly better than having no cover at all.
MPPI will provide cover you in the event of an accident, sickness or unemployment – which is why it’s sometimes called ASU insurance. Unlike income protection, MPPI will normally only pay out for one or two years after you stop working, so although it will give you breathing space to make new arrangements, it is not a solution if you are likely to be out of work for a long time.
Critical illness cover and life insurance
Two other products to consider are critical illness cover and life insurance which both pay out a lump sum that could be used to pay off your mortgage.
Critical illness cover is designed to ease financial hardship if you become seriously ill or disabled. It will pay out a one-off cash sum if you’re diagnosed with one of a number of listed critical illnesses, including some types of cancer, a heart attack or stroke, multiple sclerosis or the loss of limbs.
Life insurance will pay out a lump sum if you die during the policy term. This kind of cover is especially important if you have dependents, and want to make sure the mortgage would be paid off after your death.
Take advice before buying protection insurance
Depending on your circumstances there may also be other protection insurance products you could consider. It’s really important to take advice before buying any form of protection insurance as the last thing you want when you’re in a difficult situation is to find that your insurance won’t pay out. You need to make sure you’re clear what will and won’t be covered.