Most literature on the Internet relating to mortgage protection refers to payment protection insurance (MPPI). This type of insurance only provides short-term mortgage cover for sickness and injury. For example, this policy type will pay home loan repayments if the policyholder suffers sickness or injury for either 12 months or 24 months only. At the end of this policy term the loan holder will have to make their repayments from their own funds. The insurance market does provide longer term policies that can be used to cover a home loan, namely income protection and critical illness insurance. Although these policies are not designed specifically for mortgages they can be used for mortgage protection purposes, much like mortgage life insurance (which is a basic life insurance policy adapted to cover home loans).
Income Protection Insurance
Income protection is designed to cover lost earnings due to incapacity (sickness or injury). It is possible to insure up to 65 percent of gross (pre-tax) earnings. Unlike MPPI, the term length for this type of policy can last all the way up to retirement. This means that the policy would pay a monthly benefit until the policyholder either returned to work or the policy term ended, and not just for a maximum term of 24 months like MPPI. The monthly benefit can be spent however the policyholder decides, including on mortgage loan repayments and living expenses. However, it should be noted that income protection cannot be used to provide loan protection against redundancy. For complete protection an individual could take out both short-term redundancy cover and long-term income protection for sickness or injury.
Critical Illness Insurance
Critical illness is another form of long-term incapacity protection. In that respect it is similar to income protection except that the policy would payout a lump sum (rather than a monthly benefit) upon the diagnosis of a specified critical illness (specified in the policy wording document). Therefore if the policyholder suffers a critical illness they would be able to pay off their loan in full. Critical illness cover is often included as an additional option in mortgage life insurance policies. The types of illnesses covered include a stroke, heart attack and cancer, just to name a few. It is not uncommon for individuals to take out MPPI, life insurance and critical illness under one mortgage protection plan.
This article was produced by James P White of Drewberry Mortgage Protection Cover, specialist providers of information, advice and broking services in the mortgage life assurance and mortgage payment protection insurance markets.