Your mortgage is possibly the biggest expense you will meet in life, but what happens if you can no longer repay it? Here is a guide regarding the types of insurance that can help you settle your mortgage.
What will you need?
There are four types of insurance that you should consider when taking out a mortgage:
- Life Insurance: availed to cover the cost of paying off your mortgage, if you die before it is paid off.
- Critical illness cover: availed to help cover the cost of paying off your mortgage if you get diagnosed with a life-changing condition.
- Buildings insurance: availed to cover the rebuild costs if something happens to your home.
- Income protection: availed to help cover your mortgage payments each month if you are not able to work because of an accident, redundancy, or sickness.
This type of insurance is usually required when you have a mortgage and could save you a lot of money if something damages your home, like a flood or fire.
Without building insurance, you would need to foot the bill of the rebuild of your home, and pay your mortgage at the same time.
If you die during the term of the policy, a life insurance policy could pay off your mortgage. There are two types you could weigh in on:
- Level term life insurance: If you die during the term of the policy, this will pay out an amount that you have chosen.
- Decreasing term life insurance: You could avail this type of policy to lessen its payout at the same rate as your mortgage balance every month. Since the payout decreases every month, this will cost less than a level term policy.
Critical illness cover
If you suffer a stroke or get diagnosed with a serious condition, like cancer, this kind of insurance pays out a lump sum.
Each policy has a list of conditions that it covers, and also a list of exclusions, so examine the terms before you buy.
There are three kinds of critical illness cover:
- Increasing cover: The premiums and payout amount increase with the rate of inflation every year.
- Level cover: The premiums and payout stay the same throughout the policy.
- Decreasing cover: Premiums are normally lower compared to level cover. However, the payout decreases every month. You can make use of this to follow your mortgage as it is repaid.
Some insurance companies let you add critical illness cover to a life insurance policy when you apply.
However, you do not normally get a better deal if you buy the two together, so shop around for both to discover the best cover for the lowest price.
An income protection policy could pay you an income until you can work again after having an accident, becoming sick, or even becoming redundant.
These policies can cover up to a set percentage of your income. For example, 65%, or about to a fixed monthly amount of £2,000.
You could look for a policy that lasts for only one year, or up to the date of your retirement. The longer the policy is, the more expensive it will be.
What is MPPI?
When you take out a mortgage, your lender may offer you a MPPI or a mortgage payment protection insurance policy.
This is similar to a standard income protection policy, so rather than accepting the policy your lender offers you, examine as many policies as possible to get the best price.