If you’re a homeowner, your biggest direct debit is probably a mortgage payment. Given the rapid rise in house prices over the last decade, it’s easy to see how people fall behind on payments when they’re hit by sickness or unexpected unemployment. As with most eventualities, you can protect yourself against it – at a cost.
In this post, I’ll introduce Mortgage Payment Protection Insurance (MPPI), explaining how it works, what it covers, and what alternatives are available.
How does Mortgage Payment Protection Insurance work?
In return for a monthly premium, an MPPI policy usually covers your monthly mortgage payments for up to two years in the event of accident, sickness, or redundancy. Payments are typically capped at £2,000 or 65% of your salary, whichever is lower. ((If you’re self-employed through a limited company, this might be based on your payroll salary and not on any dividends. You need to check this with any potential insurer.)) Some policies also cover other major outgoings, such as Council Tax.
MPPI is sometimes referred to as an ASU policy. ASU stands for Accident, Sickness, and Unemployment. Unemployment is misleading, though, as the policies cover only redundancy – so, it’s no good if you’re sacked or decide to resign. To claim for redundancy, you need to be registered unemployed and actively seeking work. MPPI doesn’t cover voluntary redundancy, unless you’ve taken this option to become a full-time carer.
For the Sickness element, certain illnesses and pre-existing conditions are excluded, so you need to be clear on what’s covered by talking to the insurer. Don’t pay for something that you can’t use.
Many MPPI policies don’t pay out for the first 90 days, so you’ll require additional provision in the form of an emergency fund or sick pay from your employer. You can also opt to extend this deferral period to reduce the cost of your premiums.
Before signing up for any kind of income protection, it’s important to check your current sick pay entitlement. This ensures that there won’t be a gap or that you’re not paying for more cover than you need. For instance, if you’d receive six months’ full pay while on sick leave, you could defer your MPPI for that period. This reduces the likelihood of your insurer having to pay out, so your monthly premiums are lower.
Alternatives to Mortgage Payment Protection Insurance
Before buying or renewing MPPI, consider the alternatives. Would MPPI be enough for you? Do you have additional resources to cover your other financial commitments, such as food, heating, and credit card repayments? If not, it might make sense to look at Short-Term Income Protection (STIP) or Income Protection Insurance instead.
STIP, like MPPI, is short-term, but it covers more than your mortgage. Income Protection Insurance is similar to STIP buts keeps paying out until you’re able to return to work. Although more expensive than the other two products, it covers more medical conditions and provides longer-term security.
The Government offers some assistance, too. Support for Mortgage Interest (SMI) is a loan that you repay with interest only when you sell or transfer ownership of your home (or you can choose to repay it earlier). To be eligible for SMI, you need to be in receipt of a qualifying benefit, such as Statutory Sick Pay (SSP) or Employment and Support Allowance (ESA). The size of loan depends on the type of benefit you receive and various other factors. In some cases, it covers the interest on up to £200,000 of your mortgage. Note, though, this is just the interest – you’d need to get your lender to waive capital repayments or continue paying them yourself. For more guidance on SMI, take a look at the Money Advice Service resources.
Your mortgage lender almost certainly offers their own MPPI product that they want you to buy. Although this is convenient, it might not be the right policy for you. Check what’s covered then find out whether you could get a cheaper policy elsewhere. Unless you know the policy details it’s impossible to make an effective comparison. Saving £10 per month could make a big difference over the lifetime of your mortgage.
If you haven’t done so already, investigate Short-Term Income Protection (STIP) and Income Protection Insurance to see whether either is a better option for you. Don’t forget other forms of support – your partner or family might be able to cover your main outgoings in the short term.
Set aside some time to read any policy you’re considering. As this is a complex area, you could end up paying for something that doesn’t suit your needs. Advisory brokers, although more expensive than going direct to an insurer, offer expert advice and guide you through some of the complexities. This is especially important if you have pre-existing medical conditions. Visit MoneySavingExpert for recommendations. You could also consult an Independent Financial Advisor if you’re looking at insurance during a wider review of your money situation.
Most of us buy homes for the sense of security, so make sure you’ve protected your most valuable asset.
This post is for information only and does not constitute financial advice.
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